# Exchange of similar nonmonetary operating assets

Although some accountants believe exchanges of similar assets should be treated the same as exchanges of dissimilar ones, GAAP treat these transactions as being substantively different. That is, the exchange is viewed as a restructuring of the firm’s productive capacity rather than a disposal and acquisition. Consequently, GAAP prescribe a treatment for these exchanges that differs from the one used for dissimilar assets. For exchanges of similar assets, the cost of the new asset should be based on the lower of the book or fair value of the old asset.

## Exchanges of similar nonmonetary operating assets without cash

If no cash is involved, the cost of the new asset is the lower of the book or fair value of the old one. Assume these facts about an old asset that is exchanged for a new one:

These entries would be recorded if the fair value of the old asset were to be \$2,100 or \$1,700:

Thus, only losses can be recognized on exchanges of similar operating assets when no cash is involved. If the fair value of the new asset is known with more certainty than the fair value of the old asset, the cost of the new asset would be the lower of its fair value or the book value of the old asset.

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## Exchanges with cash given

If cash is given by the buyer, the cost of the new asset is the sum of the cash paid and the lower of the old asset’s fair or book value. For the above example, these entries would be recorded if the buyer were to give \$5,000 cash in addition to the old asset:

If the fair value of the new asset is more reliably known, the cost of the new asset is the lower of the fair value or the sum of the cash paid plus the book value of the old asset.

When an old asset is given up in exchange for a new similar asset and cash, the viewpoint of the GAAP is that part of the firm’s productive capacity is sold and part of it is restructured. This interpretation is consistent with the underlying theory described earlier. Implementing it creates the need for allocating the book value of the old asset into the part that is sold and the part that is exchanged. The allocation is done on the basis of the proportional relationship between the fair value of the new asset and the cash received.

### Example

For example, assume that an old asset is exchanged for \$5,000 cash and a new asset worth \$15,000. These calculations would determine which fraction of the old asset was sold and which was traded:

Then, these percentages would be used to determine the book value of the sold and exchanged. Assume these facts about the old asset:

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