Professor Adams' Lecture Materials

LO10-06: Determine the initial cost of individual property, plant, and equipment and intangible assets acquired in exchange for other nonmonetary assets.

Asset Exchanges

"Sometimes a company will acquire a new asset by giving up an existing asset. For example, a company might purchase a new delivery truck by trading in its old delivery truck" (Spiceland et al. 2019, p. 531).

Example

A company acquires a new set of laser equipment by trading in its old laser equipment and paying cash.

Old Laser equipment

Original cost: $500,000
Accumulated depreciation: $400,000
Net book value (original cost - acc. depreciation): $100,000
Fair value: $150,000

New laser equipment

Cost of new equipment:

Trading in old equipment and
$430,000 cash.

Special issues related to asset exchanges

What to do when fair value cannot be determined

If fair value cannot be determined, the asset received is valued at the book value of the asset given.

What to do when there is a lack of commercial substance

"To prevent a company from exchanging an asset whose fair value is greater than book value for the sole purpose of recognizing a gain, fair value can be used only in gain situations that have commercial substance" (Spiceland et al. 2018, p. 532).

Commercial substance occurs when future cash flows change as a result of the asset exchange. For example, exchanging a vacant piece of land for a manufacturing facility will likely change a company's future cash flows.

When an exchange lacks commercial substance, a gain cannot be recorded.