What are Non-Monetary Exchanges?
In a special type of exchange, the transfer of assets and liabilities occurs with another entity this is called a non-monetary exchange. Real asset swap happens between two organizations that exchange assets of one fixed asset to another.
The accounting for this non-monetary exchange takes place based on the fair values of the assets that are transferred. The cost of the recorded non-monetary asset is to be determined which is thus recorded in the following preference:
At the fair value of the asset that is transferred in exchange for it.
At the fair value of the asset that is received, if the fair value of the asset is more evident than its fair value.
At the recorded amount of the asset that is surrendered, if no fair values are to be determined.
Non-monetary Transactions Commercial Substance
The commercial substance of a non-monetary exchange is dependent on the fluctuations of the future cash flows that are expected to be a significant result of the exchange.
A business transaction that has a commercial substance is expected to have varied cash flows of a business which will change as a result of this transaction. A change in the cash flows is considered to be a significant change in any of the following cases:
Risk - As like experiencing an increase in the risk which will inbound cash flows, that will occur else than a transaction.
Timing - The change in timing of cash inflows that are received as the result of a transaction.
Amount - Change in the amount that is paid as the result of such a transaction.
Non-Monetary Exchanges ASC section 845
ASC 845-10 notes as following:
Generally, the business transactions involve the exchanges of cash or other monetary assets or other liabilities for goods or services. The amount of monetary assets or the liabilities which are exchanged provides an objective basis for measuring the cost of the non-monetary assets or the services that are received by an entity as well as for measuring the gain or loss on non-monetary assets that are transferred from an entity. These transactions involve either of the following:
Exchange with another entity, also known as a reciprocal transfer which involves principally the non-monetary assets or liabilities.
A transfer of the non-monetary assets for which no assets are received or are relinquished in exchange is a non-reciprocal transfer.
Both the exchanges and the non-reciprocal transfers which involve little or no monetary assets or liabilities are referred to as non-monetary transactions.
Non-Monetary Transactions
Nonmonetary transactions are either reciprocal or non-reciprocal. Reciprocal, that is the two-way non-monetary transactions involve more than two or two parties who exchange non monetary goods, services, or assets. Non-reciprocal, which is the one-way non-monetary transactions involving the transfer of goods, services, or assets from one party to another, such as a business that donates the employees.
PIK is the use of a good or service where it is paid instead of cash. This also refers to a financial instrument that pays interest or dividends to the investors of bonds, notes, or the preferred stock. Payment-in-kind securities are attractive to those companies who are preferring not to make cash outlays.
In either case, in-kind transactions are the non-monetary type. For example, farmland that is given a free room and board instead of receiving the hourly wage in exchange for helping out on the farm’s work is an example of payment-in-kind.
The Internal Revenue Service or the IRS refers to payment-in-kind as bartering of income. The IRS mandates the people who receive payment-in-kind income through bartering to report it on their income tax return. For example, if a plumber accepts a side of the beef loaf in exchange for services, he should report accordingly the fair market value of the beef loaf or his usual fee as income on his income tax return.
Non-Monetary Transactions Journal Entry
Company exchanged a small truck with a book value of Rs.45,000 (cost of Rs.70,000 and accumulated depreciation of Rs.25,000) for a delivery van. A dealer with experience in this market segment told the company that the fair value of the truck is Rs.50,000. The company will also pay Rs.8,000 cash as part of the exchange. This transaction has commercial substance.
The Cost of the Delivery Van is:
The Gain on the Exchange is:
The Journal Entry For Recording the Exchange Will Be:
FAQs on Non-Monetary Exchanges: Definition and Examples
1. What are non-monetary exchanges in Economics?
Non-monetary exchanges are transactions where goods and services are exchanged directly for other goods and services without the use of money as a medium of exchange. These activities contribute to economic welfare but are not included in the calculation of a country's national income because their market value is difficult to determine.
2. Can you provide some common examples of non-monetary exchanges?
Certainly. Common examples of non-monetary exchanges that occur in our daily lives include:
The services provided by a homemaker, such as cooking, cleaning, and childcare.
Vegetables and fruits grown in a kitchen garden for personal consumption.
A farmer consuming a portion of their own produce.
A doctor providing medical advice to a lawyer in exchange for legal services, which is a form of the barter system.
3. Why are non-monetary exchanges a major limitation in the calculation of Gross Domestic Product (GDP)?
Non-monetary exchanges are a significant limitation because GDP only measures the market value of goods and services that are officially transacted for money. Since these exchanges are not routed through the market, their value is not estimated or recorded. This leads to an underestimation of the true level of production and economic welfare in an economy, especially in rural or developing regions where such exchanges are more prevalent.
4. What is the primary difference between a monetary exchange and a non-monetary exchange?
The primary difference lies in the medium of exchange. In a monetary exchange, goods or services are sold for money (like rupees, dollars, etc.), which is then used to buy other goods or services. In a non-monetary exchange, there is a direct trade of goods or services for other goods or services, completely bypassing the use of currency.
5. How does the modern concept of non-monetary exchanges relate to the traditional barter system?
The traditional barter system was the principal mode of transaction in ancient economies before the invention of money. Modern non-monetary exchanges share the same core principle of trading goods/services directly. However, the key difference is the context. Barter was a necessity due to the absence of a common medium of exchange, whereas modern non-monetary exchanges occur for reasons of convenience, tradition, or informal arrangements within a predominantly money-based economy.
6. Can a non-monetary exchange be considered an externality?
No, a non-monetary exchange itself is not an externality, but it can create one. An externality is an unintended consequence (positive or negative) of an economic activity that affects a third party not involved in the transaction. For example, if you maintain a beautiful garden for your own enjoyment (a non-monetary activity), it creates a positive externality for your neighbours who also enjoy the view without paying for it. The exchange is your labour for personal satisfaction, while the externality is the benefit to others.
