54 ASC 845 NONMONETARY TRANSACTIONS
Types of Nonmonetary Transactions
Modification of the Basic Principle
Recognition of gains or losses
Example of accounting for a nonreciprocal transfer with a nonowner
Example of an exchange involving no boot
Nonmonetary Exchanges that Include Monetary Consideration (Boot)
Example of an exchange involving no commercial substance and boot
Exchanges of Real Estate Involving Monetary Consideration (Boot)
Inventory purchases and sales with the same counterparty
Determining whether transactions constitute a single exchange
Example of counterparty inventory transfers
Exchange of Product or Property Held for Sale for Productive Assets
Exchanges Involving Assets that Constitute a Business
PERSPECTIVE AND ISSUES
Subtopics
ASC 845, Nonmonetary Transactions, has only one subtopic:
- ASC 845-10, Overall, which includes five Subsections:
- General
- Purchases and sales of inventory with the same counterparty
- Barter transactions
- Exchanges involving monetary consideration
- Exchanges of a nonfinancial asset for a noncontrolling ownership interest.
Scope and Scope Exceptions
Several variants of noncash transactions are governed by ASC 845. ASC 845-10-15-4 lists scope exceptions. The following types of transactions are not treated as nonmonetary transactions:
- A business combination accounted for by an entity according to the provisions of ASC 805 or a combination accounted for by a not-for-profit entity according to the provisions of ASC 958-805
- A transfer of nonmonetary assets solely between entities or persons under common control, such as between a parent and its subsidiaries or between two subsidiaries of the same parent, or between a corporate joint venture and its owners
- Acquisition of nonmonetary assets or services on issuance of the capital stock of an entity under ASC 718-10 and ASC 505-50
- Stock issued or received in stock dividends and stock
- A transfer of assets to an entity in exchange for equity interest in that entity (except for certain exchanges of a nonfinancial asset for a noncontrolling ownership interest)
- A pooling of assets in a joint undertaking intended to find, develop, or produce oil or gas from a particular property or group of properties
- The exchange of a part of an operating interest owned for a part of an operating interest owned by another party that is subject to ASC 932-360-55-6
- The transfer of a financial asset within the scope of ASC 860-10-15
- Involuntary conversions specified in ASC 605-40-15-2.
(ASC 845-10-15-4)
Overview
Accounting Standards Codification (ASC) 845, Nonmonetary Transactions, addresses those transactions in which no money changes hands. These transactions are most commonly associated with exchanges of fixed assets, but can also involve other items, such as inventory, liabilities, and ownership interests. They can also involve one-way, or nonreciprocal, transfers.
This chapter sets forth the basic structure and concepts of nonmonetary transactions, including the concept of commercial substance, rules regarding similar and dissimilar exchanges, involuntary conversions, and how to handle exchanges that include a certain amount of monetary consideration.
DEFINITIONS OF TERMS
Exchange. A reciprocal transfer between two entities, resulting in one entity acquiring assets or services or satisfying liabilities by surrendering other assets or services or incurring other obligations.
Monetary Assets and Liabilities. Monetary assets and liabilities are 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.
Nonmonetary assets and liabilities. Assets and liabilities other than monetary ones. Examples are inventories: investments in common stocks: property, plant, and equipment: and liabilities for rent collected in advance.
Nonreciprocal transfer. A transfer of assets or services in one direction from an entity to its owners (whether or not in exchange for their ownership interests) or another entity, or from its owners or another entity to the entity. An entity's reacquisition of its outstanding stock is an example of a nonreciprocal transfer.
Owners. Used broadly to include holders of ownership (equity interests) of investor-owned entities, mutual entities, or not-for-profit entities. Owners include shareholders, partners, proprietors, or members or participants of mutual entities. Owners also include owner and member interests in the net assets of not-for-profit entities.
Productive Assets. Productive assets are assets held for or used in the production of goods or services by the entity. Productive assets include an investment in another entity if the investment is accounted for by the equity method but exclude an investment not accounted for by that method. Similar productive assets are productive assets that are of the same general type, that perform the same function, or that are employed in the same line of business.
CONCEPTS, RULES, AND EXAMPLES
Types of Nonmonetary Transactions
There are three types of nonmonetary transactions identified in ASC 845:
- Nonreciprocal transfers with owners—Examples include dividends-in-kind, nonmonetary assets exchanged for common stock, split-ups, and spin-offs.
- Nonreciprocal transfers with nonowners—Examples include charitable donations of property either made or received by the reporting entity, and contributions of land by a state or local government to a private enterprise for the purpose of construction of a specified structure.
- Nonmonetary exchanges—Examples include exchanges of inventory for productive assets, exchanges of inventory for similar products, and exchanges of productive assets.
(ASC 845-10-05-3)
General Rule
The primary accounting issue in nonmonetary transactions is the determination of the amount to assign to the nonmonetary assets or services transferred to or from the reporting entity.
The general rule is to value the transaction at the fair value of the asset given up, unless the fair value of the asset received is more clearly evident, and to recognize gain or loss on the difference between the fair value and carrying value of the asset. The definition of fair value in ASC 845 is the uniform definition prescribed by ASC 820. ASC 820 provides that when one of the parties to a nonmonetary transaction could have elected to receive cash in lieu of the nonmonetary asset, the amount of cash that would have been received may be the best evidence of the fair value of the nonmonetary assets exchanged. The fair value of the asset surrendered should be used to value the exchange unless the fair value of the asset received is more clearly evident of the fair value.
Modification of the Basic Principle
ASC 845-10-30-3 requires states that under certain circumstances a nonmonetary exchange should be measured based on the recorded amount (after reduction, if appropriate, for an indicated impairment of value) of the nonmonetary asset relinquished, and not on the fair values of the exchanged asset, if any of the following conditions apply:
- The fair value of neither the asset received not the asset relinquished is determinable within reasonable limits.
- The transaction is an exchange of a product or property held for sale in the ordinary course of business for a product of property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange.
- The transaction lacks commercial substance.
NOTE: ASC 845 states that a transfer of a nonmonetary asset will not qualify as an exchange if the transferor has substantial continuing involvement in the transferred assets that result in the transferee not obtaining the usual risks and rewards associated with ownership of the transferred assets.
Commercial Substance
As explained in ASC 845-10-30-4, a nonmonetary exchange is subjected to a test to determine whether or not it has “commercial substance.” An exchange has commercial substance if cash flows change as a result of the exchange. If determined to have commercial substance, the exchange is recorded at the fair value of the transferred asset. If the transaction is determined not to have commercial substance, the exchange is recognized using the recorded amount of the exchanged asset or assets, reduced for any applicable impairment of value.
To determine commercial substance, management estimates whether, after the exchange, the reporting entity will experience changes in its expected cash flows:
- Because of changes in amounts, timing, and/or risks (these factors are collectively referred to as the “configuration” of the expected future cash flows), or
- Because the entity-specific value of the assets received differs from the entity-specific value of the assets transferred.
If the changes in either of these criteria are significant relative to the fair values of the assets exchanged, the transaction is considered to have commercial substance. Entity-specific value is a concept defined in CON 7 that substitutes assumptions that an entity makes with respect to its own future cash flows for the corresponding assumptions that marketplace participants would make with respect to cash flows. The commercial substance criterion is not met if a transaction is structured to achieve income tax benefits or in order to achieve a specific outcome for financial reporting purposes.
Recognition of gains or losses.
Entities should recognize losses incurred on all exchanges whether or not they have commercial substance. This is so that assets are not overstated. If an exchange has commercial substance, any gain should be recognized immediately. If an exchange has no commercial substance, the entity recognizes the gain through lower depreciation expense or when it sells the asset. However, if cash or “boot” is received, the entity may recognize a portion of the gain even if there is no commercial substance.
Nonreciprocal Transfers
The valuation of most nonreciprocal transfers is based upon the fair value of the nonmonetary asset (or service) given up, unless the fair value of the nonmonetary asset received is more clearly evident. This will result in recognition of gain or loss on the difference between the fair value assigned to the transaction and the carrying value of the asset surrendered.
The valuation of nonmonetary assets distributed to owners of the reporting entity in a spin-off or other form of reorganization or liquidation is based on the recorded amounts, again after first recognizing any warranted reduction for impairment. Other nonreciprocal transfers to owners are accounted for at fair value if (1) the fair value of the assets distributed is objectively measurable, and (2) that fair value would be clearly realized by the distributing reporting entity in an outright sale at or near the time of distribution to the owners. (ASC 845-10-30-10)
- Jacobs Corporation donated depreciable property with a book value of $10,000 (cost of $25,000 less accumulated depreciation of $15,000) to a charity during the current year.
- The property had a fair value of $17,000 at the date of the transfer.
The transaction is valued at the fair value of the property transferred, and any gain or loss on the transaction is recognized on the date of the transfer. Thus, Jacobs recognizes a gain of $7,000 ($17,000 − $10,000) in the determination of the current period's net income. The entry to record the transaction would be as follows:
Note that the gain on disposition of the donated property is reported as operating income in accordance with ASC 420 and is not to be presented in the “other income” section of the income statement.
Company presidents Able and Baker agree to swap copiers, since each needs certain printing features only available on the other company's copier. Able's copier has a book value of $18,000 (cost of $24,000 less depreciation of $6,000). Both copiers have a fair value of $24,000. In testing for the commercial substance of the transaction, there is no difference in the fair values of the assets exchanged, nor are Able's future cash flows expected to significantly change as a result of the transfer. Under ASC 845, exchanges of assets that do not alter expected future cash flows are deemed to lack commercial substance, and are accounted for at book value. As a result of the trade, Able has the following unrecognized gain:
Able elects to depreciate its newly acquired copier over four years with an assumed salvage value of zero, which computes to monthly depreciation of $375. If Able had recorded the fair value of the incoming copier at $24,000, this would have required a higher monthly depreciation rate of $500. Thus, the unrecognized gain on the transaction is actually being recognized each month through reduced depreciation charges.
Able immediately exchanges its newly acquired copier for one owned by Charlie. However, the fair value of the copier owned by Charlie is $30,000, as compared to the $24,000 fair value of Able's copier (which is being carried at $18,000, the carryforward basis of its predecessor). In testing for the commercial substance of the transaction, there is determined to be a significant difference in the entity-specific values of the assets exchanged, so in accordance with the provisions of ASC 845 Able must record a gain on the transaction based on the difference in the fair values of the exchanged assets. This is done with the following entry:
Note that the full gain from both exchanges is now being recognized, since the carryforward book value of the original copier was used as the book value of the first-acquired trade, and that carryforward amount is now being compared to the fair value of the latest trade.
Able elects to depreciate the newly acquired copier over four years with no salvage value, resulting in monthly depreciation of $625.
After ten months, Able trades his newly acquired copier to Echo. The book value has now dropped to $23,750 (cost of $30,000 less depreciation of $6,250); however, due to technology advances, its fair value has declined to $20,000. This final trade has no commercial substance, in the ASC 845-defined sense, since cash flows will not materially vary between the use of these two machines. Thus, in general, under ASC 845, fair value accounting would not be employed in an exchange of similar assets lacking commercial substance; Able is required to recognize an impairment loss under ASC 360-10-40-4 if the fair value of the asset being disposed of is less than its carrying amount. Were this not done, the new asset would be recognized at an amount in excess of its realizable amount (fair value). Able has incurred the following impairment loss resulting from the transaction, which must be fully recognized in the current period:
Nonmonetary Exchanges That Include Monetary Consideration (Boot)
A single exception to the nonrecognition rule for an exchange without commercial substance occurs when the exchange involves both a monetary and nonmonetary asset being exchanged for a nonmonetary asset. The monetary portion of the exchange is termed boot. When boot is at least 25% of the fair value of the exchange, the exchange is considered a monetary transaction and both parties record the exchange at fair value. When boot less than 25% is received in an exchange, only the boot portion of the earnings process is considered to have culminated. The portion of the gain applicable to the boot is considered realized and is recognized in the determination of net income in the period of the exchange.
The formula for the recognition of the gain in an exchange involving boot of less than 25% of fair value is expressed as follows:
Amanda Excavating exchanges one of its underutilized front loaders with Dorothy Diggers, another excavator, for a bulldozer.
These assets are carried on the respective companies' statements of financial position as follows:
The terms of the exchange require Amanda to pay Dorothy $18,000 cash (boot). Boot represents approximately 23% of the fair value of the exchange computed as follows:
Note that as the payer of boot, Amanda does not recognize a gain. As a receiver of boot that is less than 25% of the fair value of the consideration received, Dorothy recognizes a pro rata gain that is computed as follows:
Total gain = $78,000 consideration − $75,000 net book value of bulldozer = $3,000
Portion of gain to be recognized by Dorothy
The accounting entries to record this transaction by Amanda and Dorothy are as follows:
Amanda records the increase in the carrying value of its excavating equipment to account for the difference between the $78,000 fair value of the bulldozer received and the $67,500 carrying value of the front loader exchanged. The accumulated depreciation on the front loader is reversed since, from the standpoint of Amanda, it has no accumulated depreciation on the bulldozer at the date of the exchange.
Dorothy records the cash received, removes the previously recorded accumulated depreciation on the bulldozer, records the $690 gain attributable to the boot as computed above and records the difference as an adjustment to the carrying value of its excavating equipment.
After recording the entries above, the carrying values of the exchanged equipment would be as follows:
To summarize, if boot is 25% or more of the fair value of an exchange, the transaction is considered a monetary transaction. In that case, both parties record the transaction at fair value. If the boot is less than 25%, the payer of the boot does not recognize a gain and the receiver of the boot must follow the pro rata recognition guidance in ASC 845-10-30-6. See the following section for rules regarding exchanges with boot involving real estate.
Gain on a monetary exchange that involves transfer by one entity of its ownership of a controlled asset, group of assets, or business to another entity in exchange for a noncontrolling ownership interest in the other entity is accounted for consistent with the guidance above for similar nonmonetary exchanges.
Exchanges of Real Estate Involving Monetary Consideration (Boot).
A transaction that involves the exchange of similar real estate and boot of 25% or more of the fair value of the exchange is recorded with two separate components, a monetary component and a nonmonetary component. The allocation is made based on the relative fair values of the monetary and nonmonetary portions at the time of the transaction. The party that receives the boot accounts for the monetary component of the transaction under ASC 360-20 as the equivalent of a sale of an interest in the underlying real estate and the nonmonetary component of the transaction based on the recorded amount (reduced, if applicable, for any impairment in value) of the nonmonetary asset relinquished. For the party that pays the boot, the monetary component is accounted for as an acquisition of real estate, and the nonmonetary component is accounted for based on the recorded amount (reduced, if applicable, for any impairment in value).
Inventory Purchases and Sales with the Same Counterparty
Some enterprises sell inventory to another party from whom they also acquire inventory in the same line of business. These transactions may be part of a single or separate arrangements and the inventory purchased or sold may be raw materials, work-in-process, or finished goods. These arrangements require careful analysis to determine if they are to be accounted for as a single exchange transaction under ASC 845, Nonmonetary Transactions, and whether they are to be recognized at fair value or at the carrying value of the inventory transferred.1
Determining whether transactions constitute a single exchange.
ASC 845-10-15-6 states that these arrangements are to be treated as a single transaction when
- An inventory transaction is legally contingent upon the occurrence of another inventory transaction with the same counterparty, or
- Two or more inventory purchase and sale transactions involving the same counterparties are entered into in contemplation of one another and are combined.
In determining whether transactions were entered into in contemplation of one another, FASB provides the following indicators, which are neither all-inclusive nor determinative (ASC 845-10-25-4):
- The counterparties have a specific legal right of offset of their respective obligations.
- The transactions are entered into simultaneously.
- The terms of the transactions were “off-market” when the arrangement was agreed to by the parties.
- The relative certainty that reciprocal inventory transactions will occur between the counterparties.
Measurement of the exchange. When management has determined that multiple transactions between the same counterparties within the same line of business are to be treated as a single exchange transaction, the measurement of the transaction depends on the type of inventory items exchanged. The rules are summarized in the following table.
Shapiro Optics Corporation (SOC) manufactures lenses for cameras, binoculars, and telescopes.
Farber Products, Inc. (FPI) is a manufacturer of digital cameras. FPI internally manufactures many of the individual parts used in its cameras including all of the electronic circuitry, and the viewfinders. FPI does not have the expertise or capacity to design and manufacture lenses or camera housings, which it accordingly purchases from external suppliers.
SOC has been a long-time supplier of lenses to FPI and due to their strong business relationship, SOC wishes to purchase electronic components from FPI similar to those that FPI uses in its camera circuit boards. SOC plans to use those components as raw materials in a popular line of telescopes it manufactures. The parties negotiate and execute an agreement with the following terms:
- FPI agrees to purchase a specified number of lenses from SOC over a two-year period.
- At least weekly, at its discretion, FPI can settle its payable to SOC by either paying the obligation in cash, or by shipping electronic components to SOC of equivalent value.
- SOC is obligated to accept the components in lieu of cash, should FPI choose to settle the outstanding balance in that manner.
Historically, based on its manufacturing capacity and its cash management policies, FPI has settled these transactions by shipping components and SOC has accepted those components and used them in manufacturing its telescopes. Upon delivery of its lenses to FPI, SOC reasonably expects that it will receive electronic components from FPI in return.
These transfers are to be treated as a single, nonmonetary transaction, since:
- The agreement that governs both the purchase transactions and their settlement is evidence that they were entered into simultaneously.
- There is a strong likelihood that each time FPI purchases lenses it will also ship components in a reciprocal inventory transaction.
- By accepting settlement of its receivable from FPI in components rather than in cash, SOP is, in effect, allowing the offset of its receivable from FPI with its payable to FPI for its purchase of components.
From the perspective of SOC, it is relinquishing its lenses, which are accounted for in its financial statements as finished goods inventory, and exchanging the lenses for electronic components, which are accounted for as raw materials used in the production of its telescopes. Assuming the transaction passes the commercial substance test (ASC 840-10-30-4), SOC will account for the nonmonetary exchange at fair value.
Exchange of Product Or Property Held for Sale for Productive Assets
An exchange of goods held for sale in the ordinary course of business for property and equipment to be used in the production process, even if they pertain to the same line of business, is recorded at fair value.
Exchanges Involving Assets That Constitute a Business
The GAAP rules for recognizing exchanges or purchases of productive assets differ materially from those that apply to acquisitions of businesses (e.g., goodwill would only be recognized in connection with the latter class of transaction, and under ASC 845 certain nonmonetary exchanges are recorded at book value).
The ASC Master Glossary defines a business as a self-sustaining integrated set of activities and assets conducted and managed for the purpose of providing a return to investors. A business consists of (1) inputs, (2) processes applied to those inputs, and (3) resulting outputs that are used to generate revenues. For a transferred set of activities and assets to be deemed a business, it must contain essentially all of the inputs and processes necessary for it to continue to conduct normal operations after the transferred assets are separated from the transferor, which includes the ability to sustain a revenue stream by providing its outputs to customers. If these criteria are not satisfied, the assets do not comprise a business and ASC 805, Business Combinations, does not apply to accounting for the acquisition.
Barter Transactions
Through third-party barter exchanges, many commercial enterprises exchange their goods and services to obtain barter credits that can be used in lieu of cash to obtain goods and services provided by other members of the barter exchange.
ASC 845-10-30-17 specifies two rebuttable presumptions that apply to accounting for exchanges of nonmonetary assets for barter credits.
- The fair value of the nonmonetary asset is presumed to be more clearly evident than the fair value of the barter credits received; and
- The fair value of the nonmonetary asset is presumed not to exceed its carrying amount.
The general rule is that when a nonmonetary asset is exchanged for barter credits, the transaction is valued at the fair value of the nonmonetary asset surrendered, since it is presumed to be the more readily determinable of the two fair values.
The first presumption can be overcome if (1) the entity is able to convert the barter credits into cash within the near term, as evidenced by past practice of doing so shortly after receipt; or (2) independent quoted market prices are available for items to be received in exchange for the barter credits. The second presumption can be overcome if persuasive evidence exists that supports a higher value.
If it subsequently becomes apparent that either of the following conditions exist, the reporting entity is to recognize an impairment loss on the barter credits:
- The carrying value of any remaining barter credits exceeds their fair value, or
- It is probable that the entity will not use all of the remaining barter credits.
If an exchange involves transfer or assumption of an operating lease for barter credits, impairment of the lease is to be measured as the amount of remaining lease costs (the discounted future rental payments plus the carrying amount of unamortized leasehold improvements) in excess of the fair value of the discounted amount of the probable future sublease rentals for the remaining lease term.
Involuntary Conversions
An involuntary conversion results from the forced disposition of property due to casualty, theft, condemnation, or threat of condemnation. Upon involuntary conversion, the owner of the asset forfeits it and potentially receives proceeds from filing a property/casualty insurance claim or from condemnation awards.
Certain conditions may occur that necessitate the involuntary conversion of a nonmonetary asset into a monetary asset. ASC 605-40, Revenue Recognition—Gains and Losses, specifies that involuntary conversions of nonmonetary assets to monetary assets are monetary transactions, and the resulting gain or loss is recognized in the period of conversion. It makes no difference that the monetary assets received are immediately reinvested in nonmonetary assets.
This rule does not apply to an interim period involuntary conversion of LIFO inventories that are intended to be replaced but have not yet been replaced by year end.
Deferred Income Taxes
A difference between the amount of gain or loss recognized for financial reporting purposes and that recognized for income tax purposes constitutes a temporary difference. The difference in the gain or loss recognized results in a difference between the income tax basis and the financial reporting basis of the asset received. The difference in the gain or loss reverses as a result of the annual charge to depreciation. The proper treatment of temporary differences is discussed in the chapter on ASC 740.
Summary
The situations involving the exchange of nonmonetary assets are summarized in the diagram on the following page.
1 This guidance does not apply to arrangements accounted for as derivatives under ASC 815, or to exchanges of software or real estate.