Chapter 2
Nonmonetary Exchanges of Real Estate
Typically, the acquisition and disposition of real property is effected through use of cash or other monetary assets and liabilities, such as mortgage loans or notes. Monetary assets and liabilities are assets and liabilities whose amounts are fixed in terms of units of currency by contract or otherwise.1 The amount of monetary assets and liabilities exchanged generally provides an objective basis for measuring the cost of the real estate acquired as well as for measuring gain or loss on the real estate transferred.2
Real estate exchange transactions involve the exchange of real estate for other real estate, that is, the exchange of nonmonetary assets for other nonmonetary assets. Two of the issues that have been debated are: Should real estate properties acquired in nonmonetary exchange transactions be recorded at their fair values? And: Should gain be recognized when appreciated real property is exchanged for other real property, such as an office building being exchanged for another office building by a real estate investment trust (REIT)?
The disposition of real estate in real estate exchange transactions is not governed by the provisions of the real estate sale guidance in Subtopic 360-20 (Financial Accounting Standards Board (FASB) Statement No. 66); rather, Topic 845, Nonmonetary Transactions (Accounting Principles Board (APB) Opinion No. 29, Accounting for Nonmonetary Transactions) is the guidance applicable to such exchange transactions. Exchanges of real estate assets for nonmonetary assets other than real estate are also governed by Topic 845 (APB Opinion No. 29).3
In 2002, the FASB and the International Accounting Standards Board (IASB) issued a Memorandum of Understanding, the so-called Norwalk Agreement, documenting their commitment to the convergence of U.S. and international accounting standards. As one of several initiatives to further the convergence between the international accounting standards and U.S. generally accepted accounting principles (U.S. GAAP), a short-term convergence project was initiated. That project was limited to certain areas of accounting in which the standard-setters believed convergence could be achieved in a relatively short time frame, generally by selecting between existing international accounting standards and U.S. GAAP.
In December 2004, as part of that short-term convergence project, the FASB amended the accounting guidance for nonmonetary transactions with the issuance of FASB Statement No. 153, Exchanges of Nonmonetary Assets, codified in Topic 845. The general principle of fair value underlying the accounting for nonmonetary transactions was not changed by Statement No. 153. However, the requirement previously in place, which stated that the “earning process must be culminated”4 as prerequisite for recording a nonmonetary exchange at fair value, precluded the use of fair value for almost all real estate exchange transactions. Statement No. 153, effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005, introduced the concept of “commercial substance.” Following the concept of commercial substance, many real estate properties acquired in exchange transactions may qualify for being recorded at fair value rather than at carryover basis. The new accounting rules may enable companies that effect Internal Revenue Code (IRC) Section 1031 exchanges to accomplish a deferral of gain for income tax purposes while at the same time being able to recognize a gain for financial accounting purposes.
Nonmonetary exchanges of real estate properties are often income tax driven: Section 1031 of the IRC provides an exception to the general rule that realized gain or loss upon disposition of property be recognized. Section 1031 acknowledges the fact that property exchanges may not change the substance of the taxpayer's relative economic position. The replacement property received in the exchange is viewed as a continuation of the old investment.5 The recognition of gain or loss on the exchange is postponed until the property received in the nontaxable exchange is subsequently disposed of in a taxable transaction. Nonrecognition of gain or loss is mandatory if the properties exchanged are (1) qualifying properties and (2) of like kind.
Due to the importance of IRC Section 1031 for exchanges of real estate properties, this chapter provides a basic overview of the tax rules related to real estate exchanges before addressing the accounting implications of nonmonetary exchanges of real estate properties.
Many different forms of Section 1031 exchanges have been developed, such as exchanges involving multiple properties, deferred exchanges, and reverse exchanges. Irrespective of their structure, they have to satisfy the requirements of Section 1031: To qualify as a Section 1031 exchange, the form of the transaction must be considered an exchange and both the property transferred and the property acquired (1) must be held for productive use in a trade or business, or for investment (referred to as “qualifying properties”) and (2) must be of like kind. Property held for productive use in a trade or business may be exchanged for property held for investment, and vice versa, as long as the properties are of like kind.
Qualifying Property
The four primary categories of qualifying property are:
1. Real property
2. Depreciable tangible property, such as business equipment6
3. Intangible nondepreciable personal property, such as patents, copyrights, and trademarks7
4. Nondepreciable personal property, such as art, antiques, and coin collections8
Section 1031 specifically excludes from qualifying property, properties held for sale, such as land held in inventory, as well as financial instruments, such as stocks, bonds, notes, or other securities, and interests in partnerships.9 Real estate used as a primary residence does also not qualify for Section 1031 exchange treatment, since it is not used in a trade or business. There is some controversy about the status of vacation homes as qualifying property, but unless an owner can demonstrate at least some rental use of a vacation home, it is unlikely that it will be considered a qualifying property.10
Like-Kind Properties
The term “like kind” refers to the nature or character of the property. For example, real property may not be exchanged for personal property, since their nature and character are not considered to be of like kind. In an exchange of two real estate properties, it is inconsequential, for purposes of applying Section 1031, if one property is improved (i.e., with roads or buildings) and the other is unimproved; the properties are considered like kind. However, real property in the United States and real property outside the United States are not considered like-kind properties.11
Exchanges such as these qualify for like-kind exchanges:
Exchange of apartment building for farm
Exchange of office building for hotel
Exchange of raw land for retail space
Holding Period
Section 1031 provides that the property to be exchanged must be held for productive use in a business or for investment, such as for future appreciation or rental income, before it can be exchanged in a Section 1031 exchange. There are no statutory requirements mandating a certain minimum holding period for a property to qualify for a Section 1031 exchange; however, the Internal Revenue Service (IRS) has ruled that property exchanged shortly after acquisition is not considered held for investment or production of income.
Exchange Involving Boot or Mortgage Relief
Consideration received or given in an exchange other than qualifying like-kind property is considered boot. Thus, boot includes cash, nonqualifying property, or property that is qualifying but not of like kind to the property exchanged. When boot is received in addition to the real property acquired in the exchange, Section 1031(b) requires that gain be recognized to the extent of the boot received, unless the boot received can be offset by the boot given. The unrecognized gain is deferred until the property acquired in the exchange is disposed of in a taxable transaction.
If the property is encumbered by mortgages, the relief of liabilities either through repayment or due to an assumption of the mortgages by the acquirer creates so-called mortgage relief or mortgage boot. Mortgage relief is treated like cash received; that is, it is considered boot. To avoid taxable gains, new liabilities must be created or assumed that equal or exceed the liabilities from which the taxpayer is relieved, or the taxpayer must add cash toward the acquisition of replacement property in the exchange.
Example—Exchange Involving Boot
BreezeCo. (BR) exchanges a real estate property with a fair value of $10 million for a real estate property with a fair value of $4 million and $6 million cash. BR's property is not encumbered by a mortgage. BR's basis in the real estate property is $4.5 million. Both properties are qualifying properties and are of like kind.
How much gain will BR have to recognize for tax purposes at the time of the transaction?
The gain realized from the exchange amounts to $5.5 million. Since the cash received by BR ($6 million) exceeds the gain from the sale ($5.5 million), all of the gain is recognized and thus is taxable.
Example—Exchange Involving Mortgage Relief
BreezeCo. (BR) exchanges a real estate property with a fair value of $10 million that is encumbered by a mortgage of $6 million for a real estate property with a fair value of $4 million. BR's basis in the property is $4.5 million. Both properties are qualifying properties and are of like kind.
How much gain will BR have to recognize for tax purposes?
BR realizes a gain of $5.5 million on the exchange transaction. The mortgage relief on the transaction amounts to $6 million. BR will have to recognize the $5.5 million gain for tax purposes, since the mortgage relief exceeds the gain on the exchange.
Example—Netting of Mortgage Boot
BreezeCo. (BR) and ExCo. enter into an exchange transaction for real estate properties. BR exchanges real estate property with a fair value of $25 million, a basis of $15 million, and an outstanding mortgage of $12 million for replacement property with a fair value of $26 million and an outstanding mortgage of $13 million. ExCo. assumes the mortgage of $12 million, and BR assumes the mortgage of $13 million. Both properties are qualifying properties and are of like kind. ExCo.'s basis in the property relinquished is $10 million.
Questions:
1. How much gain will BR have to recognize for tax purposes?
2. How much gain will ExCo. have to recognize for tax purposes?
Answers:
1. The amounts of mortgage relief received and given are netted. BR is treated as having paid boot of $1 million. BR, as the payer of boot, will not have to recognize any gain.
2. ExCo. is treated as having received $1 million of net boot, resulting in recognition of $1 million gain.
Use of Qualified Intermediary
To qualify for tax deferral under Section 1031, a transaction must be structured as an exchange, with the taxpayer relinquishing and receiving property rather than the taxpayer receiving sales proceeds or having control of the sales proceeds. A “qualified intermediary” is typically used as a middleman between the parties to the exchange to facilitate the exchange transaction. A qualified intermediary is an entity that enters into an exchange agreement with the owner of the property to be relinquished (exchanged), agreeing to receive and transfer (sell) the relinquished property and to acquire and transfer to that owner (exchanger) one or more replacement properties.12 To be considered a qualified intermediary, the intermediary must not be a relative or agent of the exchanging party or have common ownership of more than 10%.
In any Section 1031 exchange, if the seller receives the sales proceeds from the sale of the real estate relinquished, the transaction becomes taxable. Similarly, boot received directly by the seller as part of an exchange transaction will result in taxable gains, even if the boot is used in the acquisition of replacement property.13 However, receipt of sales proceeds on relinquished property by a qualified intermediary and a qualified intermediary's expenditure of funds to purchase replacement property is not treated as receipt or expenditure by the taxpayer.
The use of a qualified intermediary is particularly important in a deferred exchange transaction. In a deferred exchange, the exchange of property to be relinquished is effected in two (or more) steps: (1) the sale of the property to be relinquished, and (2) the subsequent purchase of replacement property. The deferred exchange will almost always involve a three-party or multiparty exchange rather than a literal property “swap” between two owners of qualifying real estate properties. In a deferred exchange, replacement property must be “identified” within 45 days of the transfer (closing) of the relinquished property. Additionally, the exchange must be completed within the earlier of 180 days of the transfer of the relinquished property or the due date of the tax return for the taxpayer's tax reporting.14
This overview of Section 1031 exchanges focused on the underlying principles and covered only the basics of like-kind exchanges. There are many intricacies and different forms that have not been considered in this section.
2.3 Nonmonetary Exchanges Not Governed by Topic 845 (APB Opinion No. 29)
ASC 845-10-20 (paragraph 3(c) of APB Opinion No. 29) defines an exchange as:
. . . a reciprocal transfer between two entities that results in one of the entity's acquiring assets or services or satisfying liabilities by surrendering other assets or services or incurring other obligations.
However, “[a] reciprocal transfer of a nonmonetary asset shall be deemed an exchange only if the transferor has no substantial continuing involvement in the transferred asset such that the usual risks and rewards of ownership of the asset are transferred.”15
Transactions that do not meet the definition of an exchange—for example, as a result of continuing involvement of the transferor—are not within the scope of Topic 845 (APB Opinion No. 29), even though they may qualify as like-kind exchanges (IRC Section 1031 exchanges) for tax purposes.
The following sections address some exchanges that are not within the scope of Topic 845 (APB Opinion No. 29).16
2.3.1 Exchange with Continuing Involvement of the Transferor
If the transferor retains substantial continuing involvement in a real estate property transferred in an exchange transaction, so that the usual risks and rewards of ownership in the property are not transferred, the transaction is not a nonmonetary exchange of real estate properties for purposes of Topic 845 (APB Opinion No. 29).17
As discussed in Chapter 3, the transferor of real estate often retains some form of continuing involvement with the real estate property transferred, even after title has passed. Subtopic 360-20 (FASB Statement No. 66, Accounting for Sales of Real Estate), addresses certain scenarios in which the risks and rewards of ownership are not considered transferred—the real estate property sold remains on the books of the transferor:
Option or obligation to repurchase the property18
Seller is general partner in a limited partnership that acquires an interest in the property sold and holds a receivable from the buyer for a significant part of sales price19
Seller guarantees the return of the buyer's investment or a return on that investment for an extended period20
Seller is required to initiate or support operations or continue to operate the property at its own risk for an extended period21
Additionally, any conditions that preclude gain recognition in a real estate sale transaction due to continuing involvement would also preclude gain recognition in an exchange transaction: The standards for gain recognition in exchange transactions are not less restrictive than the standards for gain recognition on sales transactions.22
Questions have arisen as to what forms of continuing involvement are deemed substantial continuing involvement in the transferred asset such that the usual risks and rewards of ownership of the asset are not transferred, resulting in the transfer not being within the scope of Topic 845 (APB Opinion No. 29). The author believes that it was not the FASB's intent to establish a higher threshold for nonmonetary exchanges than for exchanges involving monetary consideration;23 that is, if derecognition of a real estate asset is not precluded under Subtopic 360-20 (FASB Statement No. 66) for certain forms of continuing involvement, nonmonetary exchanges with these forms of continuing involvement would be governed by Topic 845 (APB Opinion No. 29).
2.3.2 In-Substance Sale and Purchase Transaction
A like-kind exchange of property under Section 1031 of the IRC often involves three or more unrelated parties that exchange monetary and nonmonetary assets, using escrow accounts or an intermediary to satisfy the requirements of Section 1031. In substance, such exchange transactions may be comprised of a monetary transaction—the sale of an asset—followed by another monetary transaction—the purchase of a replacement asset. The use of an escrow account or an intermediary to execute monetary transactions does not turn such monetary exchanges into nonmonetary transactions for accounting purposes.
Example—Three-Party Exchange
Company SunSellers (S) is contemplating a transaction in which S would sell a parcel of land to XchangeCo., which would place the cash purchase price in an escrow account. Cash in that escrow account would then be used to purchase a parcel of land from LandCo. at the direction of S.
This transaction structure may qualify as a like-kind exchange under Section 1031 of the IRC. Assuming the exchange meets the criteria established in Section 1031, S's tax basis in the new parcel would be the same as in the old parcel, and S would achieve tax deferral on any gains from the exchange.
For accounting purposes, this transaction does not qualify as a nonmonetary exchange, since S does not exchange its real property for real property held by LandCo. The use of XchangeCo. merely enables S to avoid the actual receipt of cash, but it does not turn this transaction into a nonmonetary exchange. Rather, this transaction is comprised of two monetary transactions, the sale of a parcel of land followed by the purchase of another parcel of land.
2.3.3 Nonmonetary Exchange Involving Business
Certain exchanges of real estate may constitute nonmonetary exchanges. Nevertheless, they may not be considered nonmonetary exchanges of assets governed by the provisions of Topic 845 (APB Opinion No. 29) if the real estate properties transferred in the exchange are businesses rather than assets. The exchange of businesses is accounted for following the provisions in Topic 805, Business Combinations (FASB Statement No. 141(R), Business Combinations). Topic 805 (Statement No. 141(R) requires that an exchange of a business for another business be accounted for at fair value.
The determination of whether real estate property is considered an asset or a business is based on the guidance provided in ASC 805-10-20 (paragraph 3 of Statement No. 141(R), which defines a business as “[a]n integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.” Many acquisitions of income-producing real estate properties are business combinations. Considerations regarding the determination of whether a particular set of activities and assets is a business are included in Section 1.6.1 of Chapter 1.
2.3.4 Involuntary Conversion
Events and transactions in which nonmonetary assets that are involuntarily converted to monetary assets (as a result of total or partial destruction, theft, seizure, or condemnation) are reinvested in other nonmonetary assets are considered monetary transactions rather than nonmonetary transactions. Subtopic 605-40 (FASB Interpretation (FIN) No. 30, Accounting for Involuntary Conversions of Nonmonetary Assets to Monetary Assets), provides guidance on how to account for involuntary conversions. If an involuntary conversion occurs, Subtopic 605-40 (FIN 30) requires that a gain or loss be recognized in the period of conversion, calculated as the difference between the carrying amount of the nonmonetary asset and the proceeds from the conversion. In some cases, a nonmonetary asset is destroyed or damaged in one accounting period and the amount of monetary assets to be received is not determinable until a subsequent accounting period. In those cases, gain or loss is recognized in accordance with ASC 450-10-60-4 (FASB Statement No. 5, Accounting for Contingencies).24
2.4 Accounting for Nonmonetary Exchanges
Topic 845 (APB Opinion No. 29) provides the primary accounting guidance for exchanges of nonmonetary assets, such as real estate properties.
2.4.1 General Principle—Fair Value
In general, the accounting for nonmonetary transactions is based on the fair values of the assets or services exchanged. “Fair value” is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.25
ASC 845-10-30-1 and 30-2 (paragraph 18 of APB Opinion No. 29) provide, in part:
. . . the cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is the fair value of the asset surrendered to obtain it, and a gain or loss shall be recognized on the exchange. The fair value of the asset received shall be used to measure the cost if it is more clearly evident than the fair value of the asset surrendered.
. . . If one of the parties in a nonmonetary transaction could have elected to receive cash instead of the nonmonetary asset, the amount of cash that could have been received may be evidence of the fair value of the nonmonetary assets exchanged.
This fair value principle has been in place since the issuance of APB Opinion No. 29 in 1973, yet most real estate exchanges were recorded at carryover basis before the amendment of APB Opinion No. 29 by FASB Statement No. 153 in 2004. Why? Paragraph 21 of APB Opinion No. 29 provided that the accounting for an exchange of a nonmonetary asset should be based on the recorded amount, if the exchange did not constitute the culmination of an earning process: an exchange (1) of a productive asset not held for sale in the ordinary course of business for a similar productive asset or an equivalent interest in the same or similar productive asset and (2) of a property held for sale in the ordinary course of business for a property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange were considered not to culminate an earning process. APB Opinion No. 2926 specifically mentioned the exchange of real estate for real estate as an example of exchanges of productive assets that would not qualify for being recorded at fair value.
The provisions in paragraph 21 of APB No. 29 were interpreted very narrowly. Only transactions in which real estate held for productive use (such as an office building held for rental) was exchanged for real estate held for sale in the ordinary course of business (such as land inventory) were considered to “culminate an earning process.” That is, the fair value principle applied only to these transactions. For most real estate exchanges, the real estate acquired was not recorded at fair value and gain on the exchange was not recognized.
With the issuance of FASB Statement No. 153 in December 2004, this exception to the use of fair value was eliminated. However, U.S. GAAP still includes certain exceptions to the use of fair value in nonmonetary exchanges, as outlined below.
2.4.2 Exceptions to the Fair Value Principle27
If certain conditions specified in Topic 845 (APB Opinion No. 29) for the recording of real estate acquired in exchange transactions at their fair value have not been met, the real estate acquired is measured based on the recorded amount of the real estate asset relinquished, rather than at fair value.
Conditions Precluding the Use of Fair Value
ASC 845-10-30-3 (paragraph 20 of APB Opinion No. 29) provides that a nonmonetary exchange of assets is measured based on the recorded amount of the asset relinquished (after reduction, if appropriate, for an indicated impairment of value) and not based on the fair value of the properties exchanged, if any of these three conditions are present:
1. Fair Value Not Determinable The fair value of neither the asset received nor the asset relinquished is determinable within reasonable limits.28
An example of a real estate transaction for which the fair value may be difficult to determine could be the exchange of parcels of raw land, if there are no comparable land sales. Raw land, different from income-producing properties, does not produce any cash flows or income that can be used for the determination of fair value through discounted cash flow analyses or multipliers.
2. Exchange Transaction to Facilitate Sales to Customers The exchange is an exchange of an asset held for sale in the ordinary course of business for another asset to be sold in the same line of business. The transaction is entered into to facilitate sales to customers other than the parties to the exchange.29
Typically, the exception provided for in ASC 845-10-30-3(b) (paragraph 20(b) of APB No. 29) is not an issue for real estate exchange transactions.
3. Exchange Transaction Lacks Commercial Substance. 30 As discussed, before the amendment of APB Opinion No. 29 by FASB Statement No. 153, exchanges that were not the culmination of an earning process were based on recorded amounts rather than on the fair value of the assets exchanged. FASB Statement No. 153 replaced the concept of “culmination of an earning process” with the concept of “commercial substance.” When does a nonmonetary exchange have commercial substance? ASC 845-10-30-4 (paragraph 21 of APB Opinion No. 29) explains that a nonmonetary exchange has commercial substance if the entity's future cash flows are expected to significantly change as a result of the exchange. The entity's future cash flows are expected to significantly change if either of the these criteria is met:
a. The configuration (risk, timing, and amount) of the future cash flows of the assets received differs significantly from the configuration of the future cash flows of the assets transferred.31
b. The entity-specific value of the assets received differs from the entity-specific value of the assets transferred, and the difference is significant in relation to the fair values of the assets exchanged.
Essentially, Topic 845 (APB Opinion No. 29) requires a quantitative, cash flow-based analysis to determine whether a transaction has commercial substance, albeit acknowledging that, in some instances, a qualitative assessment may be “conclusive.”32
The entity-specific value33 of an asset attempts to capture the value of an asset or liability to a particular entity. An entity computing the entity-specific value of an asset uses its expectations about its use of that asset rather than the use assumed by marketplace participants.34
As real estate properties are generally different from each other as far as risk, timing, and/or amount of the future cash flows are concerned, many exchanges of real estate properties have commercial substance.
2.5 Nonmonetary Exchange of Real Estate Involving Monetary Consideration
Exchanges of real estate often involve some monetary consideration, in addition to a nonmonetary portion, to equalize the fair value of the real estate exchanged. Topic 845 (APB Opinion No. 29) also applies to those transactions.35
Real estate exchange transactions that include some monetary consideration are divided into a portion constituting a monetary exchange, which is treated as a sale, and a portion constituting a nonmonetary exchange, which is accounted for in accordance with the provisions of Topic 845 (APB Opinion No. 29).36 The determination of the percentage to be allocated to the monetary versus the nonmonetary portion is based on the relative fair values at the date of the exchange.
2.5.1 Accounting by Receiver of Monetary Consideration
For the receiver of monetary consideration, the monetary portion is accounted for as the sale of an interest in the underlying real estate following the guidance in Subtopic 360-20 (FASB Statement No. 66). The nonmonetary portion is accounted for pursuant to the guidance in Topic 845 (APB Opinion No. 29). The real estate acquired in the exchange is recorded at fair value, unless a condition is present that would preclude the use of fair value.37
Example—Determination of Monetary Portion of Exchange38
BreezeCo. (BR) transfers real estate with a fair value of $2 million and a book value of $1.5 million to ExCo. In return, BR receives $400,000 cash, a $400,000 note, and real estate with a fair value of $1.2 million. (The net book value of the real estate transferred to BR is $800,000 on ExCo.'s books.)
What are the monetary and nonmonetary portions of the transaction?
The monetary portion of the transaction is 40%, determined as the total monetary consideration ($400,000 cash and $400,000 note) divided by the total fair value of the exchange ($2 million). The nonmonetary portion of the transaction is 60%, determined as the fair value of the real estate exchanged ($1.2 million) divided by the total fair value of the exchange.
Example—Accounting by Receiver of Monetary Consideration39
This example continues the previous example: Determination of Monetary Portion of Exchange.
For purposes of this example, it is assumed that the nonmonetary exchange transaction does not meet the conditions for being recorded at fair value and that the criteria for the accrual method of accounting (for the monetary portion) have been met.
Questions
1. How much gain will BreezeCo. (BR) recognize at the time of the transaction?
2. What is the accounting basis of the property acquired by BR?
Answers
1. Gain to be recognized:
a. Monetary portion. The gain on sale is computed as the monetary consideration received less the proportionate book value of the real estate transferred in the exchange. BR will recognize $200,000 gain on the sale of real estate, computed as follows: $800,000 monetary consideration received ($400,000 cash and $400,000 note) less $600,000 book value of real estate ($1.5 million total book value of real estate transferred × 40%).
b. Nonmonetary portion. As the nonmonetary portion of the transaction does not meet the criteria for being recorded at fair value, BR will not recognize any gain on the sale of the nonmonetary portion.
2. Accounting basis of property acquired:
BR acquires real estate with a fair value of $1.2 million through the nonmonetary exchange. The portion of the book value of the real estate transferred in the exchange that is allocated to the nonmonetary exchange amounts to $900,000 ($1.5 million × 60%). As the property acquired in the nonmonetary exchange does not meet the conditions for being recorded at fair value, the real estate acquired in the nonmonetary exchange is recorded at its carryover basis of $900,000.
2.5.2 Accounting by Payer of Monetary Consideration
If the exchange transaction meets the criteria for being recorded at fair value, the payer of monetary consideration records the real estate acquired at fair value. Fair value is measured as the sum of cash paid plus the fair value of the real estate transferred in the exchange, or the fair value of the real estate received, if the fair value of the real estate received is more clearly evident. Additionally, if one of the parties to the exchange transaction could have elected to receive cash instead of the real estate, the amount of cash that could have been received may provide evidence of the fair value of the real estate.40 If the exchange transaction does not meet the criteria for being recorded at fair value, the real estate acquired in the exchange transaction is recorded at cash paid plus the carrying amount of the real estate asset transferred in the exchange.
Example—Accounting by Payer of Monetary Consideration41
This example continues from the previous example: Determination of Monetary Portion of Exchange.
For purposes of this example, it is assumed that the nonmonetary exchange transaction does not meet the conditions for being recorded at fair value.
How would ExCo. record the exchange transaction?
ExCo. would not recognize any gain. The real property acquired would be recorded at $1.6 million. This amount is calculated as follows:
Monetary Portion
The monetary portion of the transaction represents an acquisition of real estate for monetary consideration of $800,000 ($400,000 cash and $400,000 note).
Nonmonetary Portion
ExCo. records the real estate acquired through the exchange at $800,000, which represents the carrying amount of the real estate transferred in the exchange.
2.6.1 Exchange-Leaseback
In a real estate exchange-leaseback transaction, the “seller”-lessee exchanges real estate assets for other real estate assets owned by the “buyer”-lessor and leases back the real estate transferred in the exchange. An exchange-leaseback is within the scope of the real estate sale-leaseback guidance in Subtopic 840-40 (FASB Statement No. 98, Accounting for Leases: Sale-Leaseback Transactions Involving Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease Term, Initial Direct Costs of Direct Financing Leases). When evaluating an exchange-leaseback transaction, one has to determine whether the criteria for sale-leaseback accounting set forth in ASC 840-40-25-9 (paragraph 7 of Statement No. 98) are met.
Sale-leaseback accounting is appropriate only if the exchange-leaseback includes all of the following:42
A normal leaseback (active use of the property)
Adequate initial and continuing investments in the property
Payment terms and provisions that transfer all of the other risks and rewards of ownership and the absence of any other continuing involvement by the seller-lessee
Generally, in a real estate exchange, adequate initial and continuing investments in the properties acquired in the exchange do not present any issues, since the real estate received in the exchange takes the place of cash payments made by the buyer.
If the criteria for sale-leaseback accounting in ASC 840-40-25-9 (paragraph 7 of Statement No. 98) are not met, the seller-lessee continues to carry the property exchanged on its books and accounts for it using the deposit method or as a financing transaction, whichever is appropriate under the real estate guidance in Subtopic 840-40 (Statement No. 98).
If the criteria for sale-leaseback accounting are met, the seller removes the property transferred in the exchange from its books. The seller-lessee then applies Topic 845 (APB Opinion No. 29) to determine the appropriate accounting for the exchange transaction—that is, to determine whether the real estate acquired through the exchange transaction should be accounted for at fair value or carryover basis. Any gains resulting from the exchange transaction are deferred and amortized over the lease term in the same manner as a gain on a sale-leaseback transaction.43
2.6.2 Transactions between Related Parties
The scope exceptions in Topic 845 (APB Opinion No. 29) include these exchange transactions between related parties:44
Transfer of nonmonetary assets solely between companies or persons under common control, such as:
Between a parent company and its subsidiaries
Between two subsidiary corporations of the same parent
Between a corporate joint venture and its owners
Acquisition of nonmonetary assets or services on the issuance of the capital stock of an enterprise
Stock issued or received in stock dividends and stock splits, which are accounted for in accordance with Subtopic 505-20 (Accounting Research Bulletin (ARB) No. 43, Chapter 7B)
Transfer of assets to an entity in exchange for an equity interest in that entity
Comprehensive authoritative guidance related to exchange transactions between a company and its owners, between entities under common control, and between related parties in general is lacking. Determining the appropriate basis for an asset acquired in a nonmonetary transaction and deciding whether it is appropriate to recognize gain on the exchange are issues frequently encountered in practice.
Nonreciprocal Transfers to Owners
In-kind distributions to owners—other than distributions in a spin-off, reorganization, or liquidation—are generally recorded at the fair value of the nonmonetary assets transferred with a gain or loss recognized on the disposition of the asset, assuming the fair value of the nonmonetary assets distributed is objectively measurable and would be realizable to the distributing entity in an outright sale.45 If a company acquires outstanding stock (for treasury or for retirement) by transferring assets to its shareholders, the fair value of the company's reacquired stock may be a more clearly evident measure of the fair value of the assets distributed and should be used to record the exchange.46 If the fair value of the nonmonetary assets distributed is not objectively measurable, the transfer is accounted for at the recorded amounts of the assets transferred.
The general rule of recording transfers of assets to owners at the fair value of the assets transferred is not followed if the assets are transferred in a spin-off, reorganization, or liquidation of an entity. Rather, such transfers are accounted for at the recorded amounts of the assets transferred or their fair value, if lower.47 ASC 845-10-30-10 (paragraph 23 of APB Opinion No. 29) provides that “[a] pro rata distribution to owners of an entity of shares of a subsidiary or other investee entity that has been or is being consolidated or that has been or is being accounted for under the equity method is to be considered to be equivalent to a spinoff.”
Transfers of Assets in a Spin-off
A spin-off may be used by an entity to reorganize its operations. For example, an entity (the spinnor) may transfer assets into a new legal spun-off entity (the spinnee) and distribute the shares of the spinnee to its shareholders without the surrender by the shareholders of any stock of the spinnor.
Example—Spin-off48
Big Box Retailer (Big Box) owns and operates a mall and a retail store that is the anchor store in that mall. The mall and the store are managed by two separate divisions. The shareholders of Big Box decide to split Big Box into two entities so that each can focus on its own operations. To achieve this, Big Box transfers the mall's assets and operations into a newly created subsidiary, Mall Company, and distributes the shares of Mall Company to its shareholders on a pro rata basis.
The transaction is a spin-off.
Transfers of Assets between Companies under Common Control
Gain recognition on transfers of real estate—not in the ordinary course of business—between entities under common control, between a controlling shareholder and a corporation, or between subsidiary and parent is generally deferred until the real estate assets leave the controlled group.49 At the time of the exchange transaction, the real estate transferred in the exchange is measured based on the recorded amount of the asset relinquished. Similarly, the entity that receives the asset would record the asset at the transferor's carrying amount at the date of the transfer. In situations in which the real estate transferred in the exchange is impaired in value, the author believes—consistent with the accounting for nonreciprocal transfers of assets to owners—that it would be appropriate for the transferor to recognize a loss in value and for the transferee to record the real estate received at fair value.
2.7 Transfers of Nonmonetary Assets by Joint Venture Partners
Venture partners often contribute nonmonetary assets, such as land, to real estate ventures. The appropriate accounting depends on the nature of the transaction and the circumstances surrounding it. In exchanges of real estate for equity interests that occur at the formation of a joint venture, a full or partial step-up in basis is generally not permissible, unless the transfer involves a partial sale.50 Assets or businesses contributed to a joint venture subsequent to its formation are generally recorded at fair value.
2.7 Financial Statement Presentation and Disclosure
Topic 845 (APB Opinion No. 29) requires these disclosures for nonmonetary transactions:51
Nature of the transactions
Basis of accounting for the assets transferred
Gains or losses recognized on transfers
Amount of gross operating revenue recognized as a result of nonmonetary transactions
Gains or losses resulting from involuntary conversions of nonmonetary assets to monetary assets are classified in accordance with the provisions of Subtopic 225-20, Income Statement–Extraordinary and Unusual Items (APB Opinion No. 30, Reporting the Results of Operations—Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual, and Infrequently Occurring Events and Transactions).52
2.8 International Financial Reporting Standards
The issue of nonmonetary exchanges of assets was part of the short-term convergence project between the FASB and the IASB. With the amendment of APB Opinion No. 29 by FASB Statement No. 153 (codified in Topic 845), the FASB adopted the criteria set forth in International Accounting Standard (IAS) 16 that, if met, require that property, plant, and equipment acquired in a nonmonetary exchange transaction—or in a combination of a nonmonetary and a monetary transaction—be measured at fair value.
Paragraph 24 of IAS 16 provides that if property, plant, and equipment is acquired in exchange for nonmonetary assets, or a combination of monetary and nonmonetary assets, the cost to the acquiring company is “measured at fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable.” If measurement at fair value is not appropriate based on these criteria, the assets acquired are recorded at the carrying amount of the assets given up.
The guidance in IAS 16 is limited to property, plant, and equipment in contrast to Topic 845 (APB Opinion No. 29), which applies to other nonmonetary assets, such as inventories, as well. IAS 18, Revenue, addresses the nonmonetary exchange of real estate held as inventory.53 The remainder of this section outlines the International Financial Reporting Standards (IFRS) guidance related to nonmonetary exchanges of property, plant, and equipment.
2.8.1 Commercial Substance of Exchange Transaction
The determination of whether an exchange transaction has commercial substance involves a consideration of the cash flow effects related to that transaction. Paragraph 25 of IAS 16 provides that an exchange transaction has commercial substance if:
a. the configuration (risk, timing, and amount) of the cash flows of the asset received differs from the configuration of the cash flows of the asset transferred; or
b. the entity-specific value of the portion of the entity's operations affected by the transaction changes as a result of the exchange; and
c. the difference in (a) or (b) is significant relative to the fair value of the assets exchanged.
In evaluating whether a transaction has commercial substance, an entity should base its calculations on the present value of the posttax cash flows it expects to derive from operations affected by the transaction. The discount rate should reflect the entity's own assessment of the time value of money and the risks specific to those operations, rather than marketplace participants' assessments.54
2.8.2 Fair Value Measurement
Paragraph 6 of IAS 16 defines fair value as “the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's length transaction.” Like Topic 845 (APB Opinion No. 29),55 IAS 16 provides that the fair value of the asset given up be used to measure the cost of the asset received, unless the fair value of the asset received is more clearly evident.56
For some exchange transactions, comparable market transactions may not exist. For such exchange transactions, fair value is nevertheless considered reliably measurable, if
a. the variability in the range of reasonable fair value estimates is not significant for that asset or
b. the probabilities of the various estimates within the range can be reasonably assessed and used in estimating fair value.57
2.9 Synopsis of Authoritative Literature (Pre-Codification References)
APB Opinion No. 29, Accounting for Nonmonetary Transactions
APB Opinion No. 29 provides guidance for nonmonetary exchanges of assets or services, or a combination of nonmonetary and monetary exchanges of assets or services. In general, the accounting for nonmonetary transactions is based on the fair values of the assets or services involved. Following this general principle, the cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is the fair value of the asset surrendered to obtain it; a gain or loss is recognized on the exchange.
FASB Statement No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29
FASB Statement No. 153 amends APB Opinion No. 29; it retains the general principle of APB Opinion No. 29 that nonmonetary exchanges should be based on the fair values of the assets or services exchanged. Before its amendment, APB Opinion No. 29 required as prerequisite for recording a nonmonetary exchange at fair value that the earning process be culminated. FASB Statement No. 153 replaces that prerequisite with the concept of commercial substance.
FASB Interpretation No. 30, Accounting for Involuntary Conversions of Nonmonetary Assets to Monetary Assets
FIN 30 provides accounting guidance for the involuntary conversion of nonmonetary assets (such as property or equipment) to monetary assets (such as insurance proceeds). Any gains or losses from such conversions need to be recognized, irrespective of whether an enterprise reinvests the monetary assets received in replacement assets.
EITF Issue No. 84-39, Transfers of Monetary and Nonmonetary Assets among Individuals and Entities under Common Control
Deemed no longer technically helpful.
EITF Issue No. 86-29, Nonmonetary Transactions: Magnitude of Boot and the Exceptions to the Use of Fair Value
Codified in EITF Issue No. 01-2.
EITF Issue No. 87-29, Exchange of Real Estate Involving Boot
Codified in EITF Issue No. 01-2.
EITF Issue No. 89-7, Exchange of Assets or Interest in a Subsidiary for a Noncontrolling Equity Interest in a New Entity
Codified in EITF Issue No. 01-2.
EITF Issue No. 96-2, Impairment Recognition When a Nonmonetary Asset Is Exchanged or Is Distributed to Owners and Is Accounted for at the Asset's Recorded Amount
Codified in EITF Issue No. 01-2.
EITF Issue No. 98-3, Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business.
Issues
The issues are:
1. Can the exchange of assets or groups of assets involving the receipt of a consolidated business be considered an exchange of similar productive assets accounted for at historical cost pursuant to paragraph 21 of APB Opinion No. 29?
2. How should a “business” be defined?
Consensuses/Status
1. This issue is resolved with respect to the exchange of similar businesses with the issuance of FASB Statement No. 141. Paragraph 10 of FASB Statement No. 141 states that “the exchange of a business for a business also is a business combination.”
2. The Task Force reached a consensus that a business is a self-sustaining integrated set of activities and assets conducted and managed for the purpose of providing a return to investors. For a transferred set of activities and assets to be a business, it must contain all of the inputs and processes necessary for it to continue to conduct normal operations after the transferred set is separated from the transferor. The assessment of whether a transferred set is a business should be made without regard to how the transferee intends to use the transferred set.
In December 2007, the FASB issued FASB Statement No. 141(R), which applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. FASB Statement No. 141(R) nullifies EITF Issue No. 98-3.
EITF Issue No. 98-7, Accounting for Exchanges of Similar Equity Method Investments
Codified in EITF Issue No. 01-2.
EITF Issue No. 00-5, Determining Whether a Nonmonetary Transaction Is an Exchange of Similar Productive Assets
Codified in EITF Issue No. 01-2.
EITF Issue No. 01-2, Interpretations of APB Opinion No. 29, Accounting for Nonmonetary Transactions.
Issues
The issues are:58
1. What level of monetary consideration in a nonmonetary exchange causes the transaction to be considered monetary in its entirety and, therefore, outside the scope of APB Opinion No. 29?59
2. Does FASB Statement No. 66 apply to an exchange of similar real estate that is not subject to APB Opinion No. 29 because the transaction involves enough boot for the exchange to be considered monetary under the consensus for Issue 8(a)?60
3. If FASB Statement No. 66 does apply, how should it be applied?61
4. An enterprise distributes loans receivable to its owners by forming a subsidiary, transferring those loans receivable to the subsidiary, and then distributing the stock of that subsidiary to shareholders of the parent. Should the enterprise report the distribution at book value as a spin-off or at fair value as a dividend in kind if the book value of the loans receivable, which may be either the “recorded investment in the receivable” or the “carrying amount of the receivable,” is in excess of their fair value, and how should the recipient record the transaction?62
5. Should a non–pro rata split-off of all or a significant segment of a business in a corporate plan of reorganization be accounted for at historical cost or at fair value?63
Consensuses/Status
1. The Task Force reached a consensus that a transaction should be considered monetary (rather than nonmonetary) if the boot is significant and agreed that “significant” should be defined as at least 25% of the fair value of the exchange. For the monetary part of the transaction, both parties record the exchange at fair value. If boot in an exchange transaction is less than 25%, the pro rata gain recognition guidance in paragraph 22 of APB Opinion No. 29 should be applied by the receiver of boot, and the payer of boot would not recognize a gain.
2. The Task Force reached a consensus that a transaction involving an exchange of real estate that is considered a monetary transaction because boot is at least 25% of the fair value of the exchange would be allocated between two components: a monetary portion and a nonmonetary portion. The allocation between the monetary and nonmonetary portions of the transaction should be based on their relative fair values at the time of the transaction.
3. For the receiver of boot, the monetary portion is accounted for under FASB Statement No. 66 as the equivalent of a sale of an interest in the underlying real estate, and the nonmonetary portion is accounted for based on the fair value or the recorded amount pursuant to the provisions in APB Opinion No. 29. For the payer of boot, the monetary portion is accounted for as the acquisition of real estate, and the nonmonetary portion is accounted based on fair value or the recorded amount, pursuant to the provisions in APB Opinion No. 29.
4. The Task Force reached a consensus that the distribution should be reported at fair value by the enterprise and the recipient. The transaction is not a spin-off because the subsidiary does not constitute a business. Rather, the transaction should be considered a dividend-in-kind. Under paragraph 23 of APB Opinion No. 29, dividends in kind are nonreciprocal transfers of nonmonetary assets to owners that should be accounted for at fair value if the fair value of the nonmonetary asset distributed is objectively measurable and would be clearly realizable to the distributing entity in an outright sale at or near the time of distribution.
5. A non–pro rata split-off of a segment of a business in a corporate plan of reorganization should be accounted for at fair value. The Task Force also reached a consensus that a split-off of a targeted business, distributed on a pro rata basis to the holders of the related targeted stock, should be accounted for at historical cost. If the targeted stock was created in contemplation of the subsequent split-off, the creation of the targeted stock and the split-off cannot be separated; the split-off should be recorded at fair value.
American Institute of Certified Public Accountants (AICPA) Issues Paper, Accounting for Grants Received From Governments
Superseded by IAS 20.
Securities and Exchange Commission Staff Accounting Bulletin (SAB) Topic 5G, Transfers of Nonmonetary Assets By Promoters or Shareholders.64
SAB Topic 5G addresses transfers of nonmonetary assets by promoters or shareholders for all or part of a company's common stock just prior to or contemporaneously with a first-time public offering. Normally, such transfers are recorded at the transferor's historical cost. In situations where the fair value of either the stock issued or the assets acquired is objectively measurable and the transferor does not retain a substantial indirect interest in the assets as a result of stock ownership in the company, recording of the assets received at their fair value may be acceptable.
International Accounting Standard 18, Revenue
IAS 18 is applied in accounting for revenue arising from the sale of goods; the rendering of services; and the use by others of entity assets yielding interest, royalties, and dividends. IAS 18 also provides guidance for transactions in which goods or services are exchanged for other goods or services.
International Accounting Standard 16, Property, Plant, and Equipment
IAS 16 provides guidance relating to property, plant, and equipment acquired in exchange transactions. Property, plant, and equipment acquired in exchange for nonmonetary assets or in a combination of monetary and nonmonetary assets are recorded at fair value, unless the exchange transaction lacks commercial substance, or unless the fair value of neither of the assets exchanged can be determined reliably. Before its amendment in 2003 (effective 2005), IAS 16 required that property, plant, and equipment acquired in an exchange transaction be measured at fair value unless the exchanged assets were similar.
International Accounting Standard 20, Accounting for Government Grants and Disclosure of Government Assistance
IAS 20 provides guidance regarding the accounting for government grants, including grants of nonmonetary assets. Government grants are not recognized until there is reasonable assurance that the entity will comply with the conditions attached to them and that the grants will be received. Once they meet the criteria for being recognized, both the grant and the asset may be recorded at fair value. Alternatively, the asset and related grant may be recorded at nominal amounts. The following two methods of presentation are considered acceptable: (1) setting up the grant as deferred income, which is recognized as income on a systematic and rational basis over the useful life of the asset, or (2) deducting the grant in arriving at the carrying amount of the asset. Under this method, the grant is recognized into income over the life of a depreciable asset through a reduced depreciation charge.
Notes
1. Accounting Standards Codification (ASC) 845-10-20 (paragraph 3(a) of Accounting Principles Board (APB) Opinion No. 29) describes monetary assets and liabilities as “assets and liabilities whose amounts are fixed in terms of units of currency by contract or otherwise. Examples are cash, short- or long-term accounts, and notes receivable in cash, and short- or long-term accounts, and notes payable in cash.”
2. ASC 845-10-20 (APB 29, paragraph 1).
3. FASB Action Alert 07-30, July 26, 2007.
4. See Section 2.4.1 of this chapter for further discussion.
5. Reg. Section 1.1002-1(c).
6. Reg. Section 1.1031(a)(2)(b).
7. Reg. Section 1.1031(a)(2)(c).
8. Reg. Section 1.1031(a)(2)(c).
9. Internal Revenue Code (IRC) Section 1031(a)(2); also excluded are certain other assets.
10. See Moore v. Commissioner, Tax Court Memo 2007–134.
11. IRC Section 1031(h)(1).
12. Reg. Section 1.1031(k)-1(g)(4).
13. Reg. Section 1.1031(k)-1.
14. IRC Section 1031(a)(3).
15. ASC 845-10-25-1 (APB 29, paragraph 3(c))
16. Other exchange transactions not governed by Topic 845 (APB Opinion No. 29) include:
A transfer of nonmonetary assets between companies (or persons) under common control
A transfer of nonmonetary assets between a corporate joint venture and its owners
A transfer of assets to an entity in exchange for an equity interest in the entity
A transfer of a financial asset within the scope of Topic 860 (FASB Statement No. 140) (APB 29, paragraph 4)
17. ASC 845-10-25-1 (APB 29, paragraph 3(c)).
18. ASC 360-20-40-38 (FASB Statement (FAS) No. 66, paragraph 26).
19. ASC 360-20-40-40 (FAS 66, paragraph 27).
20. ASC 360-20-40-41 (FAS 66, paragraph 28).
21. ASC 360-20-40-43 (FAS 66, paragraph 29).
22. Paragraph A15 of FASB Statement No. 153 (not codified) provides, in part: “The Board noted that certain transactions that appear to be nonmonetary exchanges are, in fact, not exchanges at all because the transferor does not relinquish control of a transferred asset such that derecognition is appropriate. The Board did not want this Statement to establish a less restrictive standard for gain recognition than the standard for gain recognition that is applicable to similar transactions involving monetary consideration.”
23. FAS 153, paragraph A15 (not codified).
24. ASC 605-40-25-4 (FASB Interpretation (FIN) No. 30, paragraph 3).
25. ASC 820-10-20 (FAS 157, paragraph 5).
26. APB 29, paragraph 7 (before the amendment effected through FASB Statement No. 153).
27. ASC 845-10-30-3 (APB 29, paragraph 20).
28. ASC 845-10-30-3(a). The exception in Topic 845 (APB Opinion No. 29) for exchanges in which the fair value is not determinable within reasonable limits is similar to the International Accounting Standard Board's exception for nonmonetary asset exchanges in which the fair value of the assets exchanged is not reliably measurable, which is addressed in paragraph 24 of IAS 16.
29. ASC 845-10-30-3(b) (APB 29, paragraph 20(b)).
30. ASC 845-10-30-3(c) (APB 29, paragraph 20(c)).
31. A change in any of the elements—risk, timing, or amount—would be a change in configuration of future cash flows [ASC 845-10-30-4(a) (FAS 153, paragraph 21(a), footnote 5c)]. Whether a transaction has commercial substance is evaluated from the reporting entity's perspective (FAS 153, paragraph A7 (not codified)).
32. ASC 845-10-30-4 (APB 29, paragraph 21).
33. Concepts Statement (CON) No. 7, Using Cash Flow Information and Present Value in Accounting Measurements, states with respect to entity-specific value: “The entity-specific value (resulting from entity-specific measurement) can be characterized as the amount at which independent willing parties that share the same information and ability to generate the entity's estimated cash flows would agree to a transaction that exchanges the estimated future cash flows for a current amount” (CON 7, footnote 4).
34. ASC 845-10-30-4(b) (APB 29, paragraph 21(b), footnote 5(d)).
35. ASC 845-10-15-3 (APB 29, paragraph 4).
36. For exchanges other than real estate, exchange transactions involving boot of more than 25% are treated as monetary transactions in their entirety; they are not divided into a monetary and a nonmonetary portion [ASC 845-10-25-6 (Emerging Issues Task Force (EITF) Issue No. 01-2, Issue 8(a); Issue 10(a))].
37. Discussed in Section 2.4.2.
38. Adapted from ASC 845-10-55-29 – 55-31 (EITF Issue No. 01-2, Issue 10(b)).
39. Adapted from ASC 845-10-55-29 – 55-31 (EITF Issue No. 01-2, Issue 10(b)).
40. ASC 845-10-30-2 (APB 29, paragraph 25).
41. Adapted from ASC 845-10-55-29 – 55-37 (EITF Issue No. 01-2, Issue 10(b)).
42. See Chapter 5, Section 5.2.1.1, for further discussion.
43. ASC 840-40-25-3; ASC 840-40-35-1 – 35-3 (FAS 13, paragraph 33).
44. ASC 845-10-15-4 (APB 29, paragraph 4).
45. ASC 845-10-30-1; 30-10 (APB 29, paragraphs 18 and 23).
46. ASC 845-10-30-2 (APB 29, paragraph 18).
47. ASC 845-10-30-10 (APB 29, paragraph 23).
48. Adapted from ASC 505-60-55-2 (EITF Issue No. 02-11).
49. In the sale of real estate to an entity controlled by the seller, ASC 360-20-40-47 (paragraph 34 of FASB Statement No. 66) provides that no profit on the sale be recognized until it is realized from transactions with outside parties through sale or operations of the property.
50. See Chapter 6, Section 6.3.1.2 for further discussion.
51. ASC 845-10-50-1 and 50-2 (APB 29, paragraph 28; EITF Issue No. 00-08).
52. ASC 605-40-45-1 (FIN 30, paragraph 4).
53. Paragraph 12 of International Accounting Standard (IAS) 18 provides this guidance for the exchange of inventories: “When goods or services are exchanged or swapped for goods or services which are of a similar nature and value, the exchange is not regarded as a transaction which generates revenue. This is often the case with commodities like oil or milk where suppliers exchange or swap inventories in various locations to fulfill demand on a timely basis in a particular location. When goods are sold or services are rendered in exchange for dissimilar goods or services, the exchange is regarded as a transaction which generates revenue. The revenue is measured at the fair value of the goods or services received, adjusted by the amount of any cash or cash equivalents transferred. When the fair value of the goods or services received cannot be measured reliably, the revenue is measured at the fair value of the goods or services given up, adjusted by the amount of any cash or cash equivalents transferred.”
54. IAS 16, paragraph BC22.
55. ASC 845-10-30-1 (APB 29, paragraph 18).
56. IAS 16, paragraph 26.
57. IAS 16, paragraph 26.
58. Several of the issues addressed in EITF Issue No. 01-2 have been nullified by FASB Statement No. 153. Some of the issues that have not been nullified are outlined here.
59. EITF Issue No. 01-2, Issue 8(a).
60. EITF Issue No. 01-2, Issue 10(a); the status section in EITF Issue No. 01-2 provides, in part: “Issues 10(a) and 10(b) previously addressed circumstances in which an entity is involved in a real estate exchange that meet the following conditions: (1) the exchange includes boot that is at least 25 percent of the fair value of the exchange and (2) the exchange is either (a) real estate held for sale in the ordinary course of business for real estate to be sold in the same line of business or (b) real estate not held for sale in the ordinary course of business for similar real estate. Statement 153, however, eliminates the fair value measurement exception for nonmonetary exchanges of similar productive assets provided in Opinion 29 and replaces it with an exception from fair value measurement for nonmonetary exchanges that lack commercial substance. Therefore, Issues 10(a) and 10(b) address circumstances in which an entity is involved in a real estate exchange that meets the following conditions: (1) the exchange includes boot that is at least 25 percent of the fair value of the exchange and (2) the exchange meets one of the conditions set forth in paragraph 20 of Opinion 29.”
61. EITF Issue No. 01-2, Issue 10(b).
62. EITF Issue No. 01-2, Issue 11.
63. EITF Issue No. 01-2, Issue 12.
64. SEC Staff Accounting Bulletin (SAB) 48.