Exchange of Similar Nonmonetary Operating Assets

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on April 24, 2023

Although some accountants argue that exchanges of similar assets should be treated the same as exchanges of dissimilar ones, the generally accepted accounting principles (GAAP) treat these transactions as being substantively different.

That is to say, the exchange is viewed as a restructuring of the firm's productive capacity rather than a disposal and acquisition.

Consequently, the 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 book or fair value of the old asset, whichever value is lower.

Exchanges of Similar Nonmonetary Operating Assets Without Cash

If cash is not involved, the cost of the new asset is either the book value or the fair value of the old one, whichever is lower.

For example, consider the following information about an old asset that has been exchanged for a new one:

Data For Old Asset

The following sets of entries are recorded for two different fair values of the old asset:

Journal Entries For Exchanges of Similar Nonmonetary Operating Assets Without Cash

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 is either the fair value or the book value of the old asset, whichever is lower.

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:

Journal Entries For Exchanges With Cash Given

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

Exchanges With Cash Received

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:

Data For Asset Exchange

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

Data For Old Asset Exchange With Cash

The following calculations are made:

Book Values of Portions of Old Asset

Thus, the entry for the portion sold would be:

Journal Entry For Portion of Asset Sold

The cost of the new asset is equal to the book value of the exchanged portion of the old asset. The entry would be:

Journal Entry For New Asset After Exchange of Assets

In practice, the two entries are combined:

If the book value of the old asset is greater than the sum of the cash received and the fair value of the new asset, the firm records a loss equal to the difference, and the book value does not need to be partitioned into the sold and traded portions.

Suppose the following facts about two assets:

Example Asset Exchange

In this case, the total loss on disposal is $4,000 (i.e., $16,000 less $12,000). The transaction would be recorded with the following journal entry:

Journal Entry For Exchange With Cash Given

Exchange of Similar Nonmonetary Operating Assets FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.