FAS 153: Accounting for Nonmonetary Asset Exchanges

Statement of Financial Accounting Standards 153, “Exchanges of Nonmonetary Assets,” established principles for transactions where businesses trade assets rather than selling them for cash. It aligned U.S. accounting with international standards by measuring these exchanges based on the fair value of the assets involved, amending previous guidance that allowed exceptions for similar asset exchanges.

While FAS 153 is no longer a standalone rule, its concepts are now part of the Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) under Topic 845, Nonmonetary Transactions. This codification is the authoritative source for U.S. Generally Accepted Accounting Principles (GAAP), so understanding these principles is necessary for applying current rules.

The Concept of Commercial Substance

An exchange of nonmonetary assets is evaluated based on whether the transaction has “commercial substance.” This concept is the determining factor in how the transaction is recorded. An exchange has commercial substance if it is expected to cause a meaningful change in the company’s future cash flows.

To meet this threshold, the transaction must satisfy one of two conditions. First, the configuration of the future cash flows from the asset received—meaning their risk, timing, and amount—must be significantly different from the cash flows of the asset given up. Second, the transaction must alter the entity-specific value of the operations affected by the exchange.

For instance, a courier company trading one of its delivery vans for an identical van would likely lack commercial substance. The timing, risk, and amount of cash flows generated by the new van are not expected to differ significantly. In contrast, if that same company trades a van for automated sorting equipment, the exchange would have commercial substance because the new equipment changes the company’s operations and future cash flow potential.

Accounting for Exchanges with Commercial Substance

When a nonmonetary exchange has commercial substance, the accounting is guided by fair value. The transaction is recorded at the fair value of the asset given up or the asset received, whichever is more clearly measurable. This approach treats the exchange as if two separate events occurred: a sale of the old asset and a purchase of a new one.

Any gain or loss on the transaction must be recognized immediately. The gain or loss is calculated as the difference between the fair value of the asset surrendered and its book value (original cost minus accumulated depreciation) and is reported on the income statement.

For example, a company trades equipment with a book value of $30,000 for a new machine. The old equipment has a fair value of $50,000. The company would record the new machine at its $50,000 fair value and recognize a gain of $20,000 on its income statement.

Accounting for Exchanges Lacking Commercial Substance

If a nonmonetary exchange lacks commercial substance, the accounting prioritizes the carrying value of the assets over their fair value. The new asset acquired is recorded at the book value of the asset given up. This method avoids the recognition of gains, effectively deferring any unrealized appreciation into the new asset’s basis.

The rule is that gains are not recognized because the company’s economic position has not substantially changed. This prevents companies from engineering artificial gains by simply swapping similar assets.

There is an exception to the no-gain rule. If the exchange indicates a loss, that loss must be recognized immediately. A loss is indicated if the fair value of the asset being traded away is less than its book value, and the new asset is recorded at this lower fair value.

For example, if a company exchanges a truck with a book value of $15,000 and a fair value of $20,000 for a similar truck, the exchange lacks commercial substance. The new truck would be recorded at the old truck’s book value of $15,000, and the $5,000 potential gain is not recognized. If that same truck had a fair value of only $12,000, the company must recognize a $3,000 loss and record the new truck at the $12,000 fair value.

Impact of Cash (Boot) on the Exchange

The inclusion of cash, often referred to as “boot,” in a nonmonetary exchange can alter the accounting, particularly for transactions that lack commercial substance. When an exchange has commercial substance, the payment or receipt of cash does not change the fundamental accounting. The transaction is still measured at fair value, and any gains or losses are fully recognized.

For exchanges lacking commercial substance, the rules differ based on whether cash is paid or received. If a company pays cash as part of the exchange, it does not trigger the recognition of a gain. The new asset is recorded at the book value of the old asset plus the cash paid.

The situation becomes more complex when cash is received in an exchange that lacks commercial substance. In this case, a portion of the gain on the exchange must be recognized. The recognized gain is calculated based on the ratio of the cash received to the total fair value of the consideration received (cash plus the fair value of the new asset). However, if the cash received represents 25% or more of the fair value of the exchange, the transaction is treated as a monetary sale, and the entire gain is recognized.

For instance, a company trades an asset with a book value of $40,000 and a fair value of $50,000 for a similar asset with a fair value of $45,000, and it also receives $5,000 in cash. The total gain is $10,000 ($50,000 fair value of old asset – $40,000 book value). Since the cash ($5,000) is 10% of the total consideration received ($50,000), the company must recognize 10% of the gain, which amounts to $1,000.

Financial Statement Disclosure Requirements

Companies engaging in nonmonetary asset exchanges must provide specific information in their financial statement footnotes. These disclosures are designed to provide transparency regarding how these exchanges were accounted for.

The required disclosures include a description of the nature of the nonmonetary transactions that occurred during the period. Companies must also state the basis of accounting used for the assets transferred, specifying whether they were recorded at fair value or book value. Finally, the disclosures must report any gains or losses recognized on the exchanges.