Non-Monetary Exchanges

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 fair value of the truck given up

Rs. 50,000

Cash paid

Rs. 8,000

Cost of a new delivery van

Rs. 58,000


The Gain on the Exchange is:

The fair value of the asset given up

Rs. 50,000

Book value of the asset given up

Rs. 45,000

Gain on exchange

Rs. 5,000


The Journal Entry For Recording the Exchange Will Be:

Particulars

Debit

Credit

DR Vehicles (Delivery van)

Rs. 58,000


DR Accumulated depreciation (Truck)

Rs. 25,000


CR Cash


Rs. 8,000

CR Vehicles (Truck)


Rs. 70,000

CR Gain on disposal of truck


Rs. 5,000

To record the exchange of assets



FAQs (Frequently Asked Questions)

1. Define Fixed Assets.

Ans. Fixed assets are those long-term assets that a company has purchased and has been using for the production of its goods and services. These Fixed assets include property, plant, and equipment. These are recorded on the balance sheet. The fixed assets are also referred to as tangible assets, which means they are physical assets.

Type of Fixed Assets are as follows: 

  • Buildings include all the facilities that are owned by the entity.

  • Computer equipment. that includes all types of computer equipment, like servers, desktop computers, and laptops.

  • Computer software. 

  • Construction in progress. 

  • Furniture and fixtures. 

  • Intangible assets. 

  • Land. 

  • Leasehold improvements.

2. What is a Non-Reciprocal Transfer?

Ans. A non-reciprocal transfer is a transfer to the nonowners, which are typically a transfer of non-monetary assets for which no assets/ economic resources are then received or relinquished in the exchange. An example here will be donations or contributions that are extended to a third party.

A nonreciprocal transfer occurs when an asset is given to a third party with no expectation of payment in the exchange. A nonreciprocal transfer is typically accounted for as the contribution. The transfer records the received asset at its fair value on the transfer date.

3. What is the Full Form of PIK?

Ans. The full-form of PIK is Payment-in-kind. Payment-in-kind (PIK) is the use of a good or service as payment instead of paying in cash. Payment-in-kind may also be referred to as a financial instrument that pays interest or dividends to the investors of bonds, notes, or preferred stock with additional securities or equity instead of cash.