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.
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: