Question

Describe the GAAP rule for calculating the cost of assets that are purchased by exchanging non-monetary assets. Include a definition of commercial substance.

Answer 1

When one or more asset may be acquired in exchange for a non-monetory asset or assets, or a combination of non-monetory and monetory asset then cost of such asset is measured at fair value unless:

a) the exchange transaction has lack of commercial substance or

b) the fair value of neither the asset received at fair value not the asset given up is reliably measurable.

if asset is measured at fair value then cost price of asset will be equal to

• Fair value of asset given up add/less cash adjustment ( 1st preference) or
• Fair value of asset received or acquired

Whichever is clearly evident.

However, if fair value of asset are not reliably measurable or exchange transaction lacks commercial substance then, Cost price of asset acquired.

If the acquired asset is not measured at fair value, its cost is measured at the carrying amount of the asset given up.

An entity determines whether an exchange transaction has commercial substance by considering the extent to which its future cash flows are expected to change as a result of the transaction. 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.