This would be a classic exchange transaction. In business, equipment is often exchanged e. Sometimes land is exchanged. Exchanges can be motivated by tax rules because neither company may be required to recognize a taxable event on the exchange. The result could be quite different if the asset was sold for cash.
How to Exchange Assets When Valuing PP&E
When fair value cannot be determined or the exchange lacks commercial substance | Course Hero
When a company exchanges a fixed asset with another and the transaction has commercial substance, it records the asset acquired at its fair value or the fair value of assets given up, whichever is readily available. In most cases, fixed assets are acquired through exchange of monetary assets, such as cash. However, there are instances where two companies engage in barter transactions of fixed assets. In accounting for such exchanges of non-monetary assets, we need to find out if the transaction has commercial substance. In plain English, it means whether the exchange would change the cash flows of the business to a significant extent. Materiality is an important consideration in determining whether commercial substance exists.
FAR - Nonmonentary exchanges (asset for asset with cash i.e. boot) Flashcards Preview
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Key to these types of transactions is the fair value, which is what the asset would fetch in an open marketplace , in other words — a transaction between unpressured parties. For example, if a business trades in an old delivery truck for a new one, the new delivery truck most likely has a longer useful life. This extended useful life affects future cash flows. GAAP is picky about accounting for these types of transactions, so make sure you follow these guidelines:. Commercial substance exists: