Question

For exchanges regarding PPE what is commercial substance under SFAS 153? What is boot? How are gains and losses reported when there is commercial substance and boot is received? How are gains and losses reported when there is no commercial substance and boot is received?

Answer 1

Ø Exchanges that have commercial substance should be accounted at fair value. Various scenarios are illustrated in the following examples. Recognize that some exchanges may lack commercial substance. For example, two companies may swap inventory and neither expects a significant change in cash flows because of the trade. Gains are not recorded on exchanges lacking commercial substance and are typically illustrated in more advanced courses.

Ø Boot is a substance which has to be given at the time of exchange of similar assets as a part of exchange .

Ø Exchanges with commercial substance if boot is available :-

               If cash (boot) is received as part of an exchange of similar assets
   --> Gain is recognized only for the cash proportion of total gain.
            --> Recognized gain = Total gain x cash proportion
             --> Cash proportion
                   = cash received / (cash received + fair value of non-cash assets     acquired)

Ø Exchanges with no commercial substance if boot is available :-

   Loss is recognized for an exchange of similar assets
            --> conservatism

            Gain is NOT recognized for an exchange of similar assets
            --> because earnings process was not culminated.