Exchanges in Assets
GAAP
In GAAP there is only one way to initially record a
fixed asset and that is the cost method.
The cost method involves recording the
acquisition cost of the fixed asset, plus the costs
of bringing the fixed asset to the condition and
location required for its use. That would include
interest on any loans, physical construction of the
asset, demolition of any pre-existing structures,
renovation of a pre-existing structure,
administrative and technical activities in
designing the asset and obtaining permits, and
administrative activities incurred during
construction.
Provision for nonmonetary exchanges
 A nonmonetary exchange uses the fair
market value of the asset given up in the
transaction or the asset received,
whichever is more clearly evident.
PAS
PAS 16 paragraph 24, provides that the cost of
an item of property, plant, and equipment
acquired in exchange for a nonmonetary asset
or a combination of monetary and
nonmonetary asset is measured at fair value.
However, the exchange is recognized at
carrying amount under the following
circumstances:
a. The exchange transaction lacks
commercial substance.
i. Commercial Substance- a new
notion and is defined as the event
or transaction causing the cash
flows of the entity to change
significantly by reason of the
exchange.
ii. An exchange transaction has
commercial substance when the
cash flows of the asset received
differ significantly fm the cash
flows of the asset transferred.
b. The fair value of the asset given or the
fair value of the asset received is not
reliably measurable.
EXCHANGE WITH COMMERCIAL SUBSTANCE
If a property is acquired in an exchange, the cost
of the property is equal to the following:
a. Fair value of asset given plus any cash
payment- on the part of the payor.
b. Fair value of asset given minus any cash
received – on the part of the recipient.
EXCHANGE WITH NO COMMERCIAL SUBSTANCE
a. If the exchange transaction lacks
commercial substance, the acquired item
of PPE is measured at the carrying
amount of the asset given.
b. No gain or loss is recognized when the
exchange lacks commercial substance.
TRADE IN
a. A form of Exchange
b. It is when a property is acquired by
exchanging another property as part
payment and the balance payable in cash
or any other form of payment in
accordance with agreed terms.
c. Trade in involves a nondealer acquiring
the asset from a dealer.
d. Usually involves a significant amount of
cash and therefore, transaction has
commercial substance.
e. The new asst is recorded at the following
order of priority:
1. Fair Value of asset given plus cash
payment
2. Trade in value f asset given plus cash
payment (in effect, this is the fair
value of the asset received.)