In simple words, non-monetary transactions are exchanges and nonreciprocal transfers that involve little or no monetary assets or liabilities. While monetary assets are assets whose amounts are fixed in terms of units of currency (e.g. cash, accounts receivable, and notes receivable), non-monetary assets are assets other than those mentioned assets. Examples are inventories, investments in common stock; and property, plant, and equipment.
In general, any exchanges and non-reciprocal transfers that involve little or do not involve cash, accounts receivables, notes receivable, accounts payable and note payable are considered as non-monetary transactions.
Other transaction examples are: dividends-in-kind, non-monetary assets exchanged for common stock, charitable donations of property, contributions of land by a state or local government to a private companies, exchanges of inventory for similar products. How are they grouped and how are those non-monetary transactions accounted? Those are what I am going to discuss through this post, based on the most current accounting standard codification codenamed ASC-845. Along with the rules, I also include necessary case examples as illustrations for better understanding. Sure, the journal entries too. But before that, let’s have a look at types of transactions that are not treated as non-monetary. Read on…
Types of Transactions Are Not Treated as Non-monetary
According to the most current accounting standard codification (a.k.a the “New U.S. GAAP,”) the following types of transactions are not treated as non-monetary:
- Exchanges of businesses required to be accounted for as business combinations
- Transfers between reporting entities under common control such as between a parent company and its subsidiaries; between two subsidiaries of the same parent; or between a corporate joint venture and the venturers.
- Issuance of equity in the reporting entity in exchange for nonmonetary assets or the performance of services.
- Stock dividends or stock splits.
- Involuntary conversions where monetary proceeds are received for the non-monetary assets stolen, seized, or destroyed, irrespective of whether the proceeds are reinvested in other non-monetary assets.
- Assets of the reporting entity exchanged for equity interests in another entity.
- Certain types of transactions of oil and gas producing companies.
- Transfers of financial assets within the scope of “transfers and servicing.”
Next, let’s have a look at the non-monetary transactions. Read on…
Types Of Non-monetary Transactions
Identified in the ASC-845, there are three types of non-monetary transactions:
1. Nonreciprocal transfers to owners – Examples: dividends-in-kind, non-monetary assets exchanged for common stock, split-ups, and spin-offs.
2. Nonreciprocal transfers with nonowners – Examples: charitable donations of property either made or received by the reporting entity, and contributions of land by a state or local government to a private enterprise for the purpose of construction of a specified structure.
3. Nonmonetary exchanges – Examples: exchanges of inventory for productive assets, exchanges of inventory for similar products, and exchanges of productive assets.
So, what is the rule for those non-monetary transactions? Move on the next section…
General Rule for Non-monetary Transactions
The primary accounting issue in non-monetary transactions is the determination of the amount to assign to the nonmonetary assets transferred to or from the reporting entity. The general rule is that the accounting for nonmonetary transactions is based on the fair values of the assets involved.
Curiously, another codes—especially the ASC 820, appends guidance to ASC 845 that provides that:
“When one of the parties to a nonmonetary transaction could have elected to receive cash in lieu of the non-monetary asset, the amount of cash that would have been received may be the best evidence of the fair value of the nonmonetary assets exchanged.”
The ASC 820 left intact, however, the guidance in ASC 845 that, in general:
“The fair value of the asset surrendered should be used to value the exchange unless the fair value of the asset received is more clearly evident of the fair value.”
Exceptions to the general rule are:
If either of the following conditions applies, the accounting for the nonmonetary transaction is based on the recorded amount (i.e., book value) of the nonmonetary asset relinquished, reduced, if applicable, by any pre-exchange impairment in its value:
- If both the fair value of the asset being relinquished and the fair value of the asset being received are not reasonably determinable, the recorded amount (i.e., book value adjusted for any applicable impairment) of the asset being relinquished may be the only amount available to objectively measure the transaction. The fair value is not considered determinable within reasonable limits if there are major uncertainties with respect to the amount that would be realized for an asset.
- An exchange of a product or property held for sale in the ordinary course of business for a product or property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange.
Also note that a transfer of a nonmonetary asset will not qualify as an exchange if the transferor has substantial continuing involvement in the transferred assets that results in the transferee not obtaining the usual risks and rewards associated with ownership of the transferred assets.
Accounting for Non-reciprocal Transfers
Unless the fair value of the non-monetary asset received is more clearly evident, the valuation of most nonreciprocal transfers is based upon the fair value of the non-monetary asset given up. This will result in recognition of gain or loss on the difference between the fair value assigned to the transaction and the carrying value of the asset surrendered.
The valuation of non-monetary assets distributed to owners of the reporting entity in a spin-off or other form of reorganization or liquidation is based on the recorded amounts, again after first recognizing any warranted reduction for impairment.
Other nonreciprocal transfers to owners are accounted for at fair value if: (a) The fair value of the assets distributed is objectively measurable; and (b) that fair value would be clearly realized by the distributing reporting entity in an outright sale at or near the time of distribution to the owners.
Example Of Accounting For A Nonreciprocal Transfer With A Non-owner
Lie Dharma Corporation donated depreciable property with a book value of $10,000 (cost of $25,000 less accumulated depreciation of $15,000) to a charity during the current year. The property had a fair value of $17,000 at the date of the transfer.
The transaction is valued at the fair value of the property transferred, and any gain or loss on the transaction is recognized on the date of the transfer. Thus, Lie Dharma recognizes a gain of $7,000 (=$17,000 – $10,000) in the determination of the current period’s net income.
The journal entry to record the transaction would be as follows:
Note that the gain on disposition of the donated property is reported as operating income and is not to be presented in the ‘other income‘ section of the income statement.
Accounting for Non-monetary Exchanges
In the past, a distinction was made between non-monetary exchanges involving dissimilar or similar assets the accounting for which differed quite dramatically. Such a distinction is no longer critical since ASC 845 mandates a “universal fair value measurement strategy,” with limited exceptions.
If an exchange involves dissimilar assets, it is to be considered the culmination of the earnings process. The general rule is to value the transaction at the fair value of the asset given up, unless the fair value of the asset received is more clearly evident, and to recognize gain or loss on the difference between the fair value and carrying value of the asset. If cash is given in addition to the nonmonetary asset, that is referred to as “boot.”
Example of an Exchange Involving Dissimilar Assets and No Boot
Putra Incorporation exchanges a forklift with a book value of $2,500 (original cost of $4,800, less accumulated depreciation of $2,300 at the transaction date) with ABC & Co. for tooling with a fair value of $3,200. No boot is exchanged in the transaction. The fair value of the forklift is not readily determinable.
In this case, Putra Inc. has a realized gain of $700 (=$3,200 – $2,500) on the exchange, using the fair value of the asset received, since the value of the asset given up cannot be ascertained.
Because the exchange involves dissimilar assets, the earnings process is deemed to have been culminated. The gain is included in the determination of Putra’s net income and income from operations (i.e., it does not qualify for extraordinary treatment).
The journal entry to record the transaction would be as follows:
[Debit]. Tools = $3,200
[Debit]. Accumulated depreciation—forklift = $2,300
[Credit]. Forklift = $4,800
[Credit]. Gain on exchange of forklift = $700
Note: Gain on this exchange is an “operating income.”
A non-monetary exchange is subjected to a test to determine whether or not it has “commercial substance.” If determined to have commercial substance, the exchange is recorded at the fair value of the transferred asset. If the transaction is determined not to have commercial substance, the exchange is recognized using the recorded amount of the exchanged asset or assets, reduced for any applicable impairment of value.
To determine commercial substance, the reporting entity estimates whether, after the exchange, it will experience changes in:
(1) Its expected cash flows because of changes in amounts, timing, and/or risks (these factors are collectively referred to as the “configuration” of the expected future cash flows); or
(2) The entity-specific value of the assets received differs from the entity-specific value of the assets transferred.
If the changes in either (1) or (2) are significant relative to the fair values of the assets exchanged, the transaction is considered to have commercial substance.
Example of an Exchange Involving Similar Assets and no Boot
Company presidents Putra and Brook agree to swap copiers, since each needs certain printing features only available on the other company’s copier. Putra’s copier has a book value of $18,000 (cost of $24,000 less depreciation of $6,000). Both copiers have a fair value of $24,000.
In testing for the commercial substance of the transaction, there is no difference in the fair values of the assets exchanged, nor are Putra’s future cash flows expected to significantly change as a result of the transfer. Exchanges of similar assets which do not alter expected future cash flows are deemed to lack commercial substance, and are accounted for at book value. As a result of the trade, Putra has the following unrecognized gain:
Fair value of Putra copier given to Brooke = $24,000
Book value of Putra copier to be given to Brooke = $18,000
Total gain (unrecognized) = $ 6,000
The journal entry by Putra to record this transaction is as follows:
[Debit]. Fixed assets—Office equipment = $18,000
[Debit]. Accumulated depreciation—Office equipment = $6,000
[Credit]. Fixed assets—Office equipment = $24,000
Putra elects to depreciate its newly acquired copier over four years with an assumed salvage value of zero, which computes to monthly depreciation of $375. If Putra had recorded the fair value of the incoming copier at $24,000, this would have required a higher monthly depreciation rate of $500. Thus, the unrecognized gain on the transaction is actually being recognized through ongoing reduced monthly depreciation charges.
Putra immediately exchanges its newly-acquired copier for one owned by Lou Corp. However, the fair value of the copier owned by Lou is $30,000, as compared to the $24,000 fair value of Putra’s copier (which is being carried at $18,000, the carryforward basis of its predecessor).
In testing for the commercial substance of the transaction, there is determined to be a significant difference in the entity-specific values of the assets exchanged, so Putra must record a gain on the transaction based on the difference in the fair values of the exchanged assets. This is done with the following journal entry:
[Debit]. Fixed assets—Office equipment = $30,000
[Debit]. Fixed assets—Office equipment = $18,000
[Credit]. Gain on disposal of office equipment = $12,000
Note that the full gain from both exchanges is now being recognized, since the carryforward book value of the original copier was used as the book value of the first-acquired trade, and that carryforward amount is now being compared to the fair value of the latest trade.
Putra elects to depreciate the newly acquired copier over four years with no salvage value, resulting in monthly depreciation of $625. After ten months, Putra trades his newly acquired copier to Mark. The book value has now dropped to $23,750 (cost of $30,000 less depreciation of $6,250); however, due to technology advances, its fair value has declined to $20,000. This final trade has no commercial substance, since cash flows will not materially vary as between the use of these two machines.
While, fair value accounting would not be employed in an exchange of similar assets lacking commercial substance, impairments must be recognized per ASC-360. Were this not done, the new asset would be recognized at an amount in excess of its realizable amount (fair value). Putra has the following impairment loss resulting from the transaction, which must be fully recognized in the current period:
Fair value of Putra copier to be given to Mark = $20,000
Book value of Putra copier to be given to Mark = (23,750)
Total loss (recognized) = $(3,750)
The entry by Putra to record this transaction would be as follows:
[Debit]. Fixed assets—Office equipment = $20,000
[Debit]. Accumulated depreciation—Office equipment = $6,250
[Credit]. Loss on asset disposal = $3,750
[Credit]. Fixed assets—Office equipment = $30,000
A single exception to the non-recognition rule for similar assets occurs when the exchange involves both a monetary and non-monetary asset being exchanged for a similar non-monetary asset. The monetary portion of the exchange is termed boot.
When boot is at least 25% of the fair value of the exchange, the exchange is considered a monetary transaction and both parties record the exchange at fair value. When boot less than 25% is received in an exchange, only the boot portion of the earnings process is considered to have culminated.
The portion of the gain applicable to the boot is considered realized and is recognized in the determination of net income in the period of the exchange.
The formula for the recognition of the gain in an exchange involving boot of less than 25% of fair value is expressed as follows:
Gain Recognized = [Boot / (Boot + Fair value of non-monetary asset received)] × Total gain indicated
An exchange of goods held for sale in the ordinary course of business for property and equipment to be used in the production process, even if they pertain to the same line of business, is recorded at fair value.
As noted above, if boot is 25% or more of the fair value of an exchange, the transaction is considered a monetary transaction. In that case, both parties record the transaction at fair value. If the boot is less than 25%, the payer of the boot does not recognize a gain and the receiver of the boot must follow the pro-rata recognition guidance in ASC 845.
Gain on a monetary exchange that involves transfer by one entity of its ownership of a controlled asset, group of assets, or business to another entity in exchange for a non-controlling ownership interest in the other entity is accounted for consistent with the guidance above for similar non-monetary exchanges.
Example of an Exchange Involving Similar Assets and Boot
ProExcavator (an excavator) exchanges one of its underutilized front loaders with QuickExcavator, another excavator, for a bulldozer. These assets are carried on the respective companies’ balance sheets as follows:
Description ProExcavator QuickExcavator
Cost $75,000 $90,000
Accumulated depreciation $ 7,500 $15,000
Net book value $67,500 $75,000
Fair (appraised) value $60,000 $78,000
The terms of the exchange require ProExcavator to pay QuickExcavator $18,000 cash (boot). Boot represents approximately 23% of the fair value of the exchange computed as follows:
Description Amount Total (%)
Fair value of front loader $60,000 77%
Cash consideration (boot) $18,000 23%
Total consideration $78,000 100%
Note that as the payer of boot, ProExcavator does not recognize a gain. As a receiver of boot that is less than 25% of the fair value of the consideration received, QuickExcavator recognizes a pro rata gain that is computed as follows:
Total gain = $78,000 consideration – $75,000 net book value of bulldozer
Total gain = $3,000
Portion of gain to be recognized by QuickExcavator:
Gain recognized = $18,000 boot / [($18,000 boot + $60,000 fair value of nonmonetary asset received = $78,000)]
Gain recognized = 23% × $3,000 gain = $690
The accounting entries to record this transaction by ProExcavator are as follows:
[Debit]. Excavating equipment = $10,500
[Debit]. Accum. depreciation—excavating equipment = $7,500
[Credit] Cash = $18,000
[Credit]. Recognized gain = 0
The accounting entries to record this transaction by QuickExcavator are as follows:
[Debit]. Accum. depreciation—excavating equipment = $15,000
[Debit]. Cash = $18,000
[Credit]. Excavating equipment = $32,310
[Credit]. Recognized gain = $690
ProExcavator records the increase in the carrying value of its excavating equipment to account for the difference between the $78,000 fair value of the bulldozer received and the $67,500 carrying value of the front loader exchanged. The accumulated depreciation on the front loader is reversed since, from the standpoint of ProExcavator, it has no accumulated depreciation on the bulldozer at the date of the exchange.
QuickExcavator records the cash received, removes the previously recorded accumulated depreciation on the bulldozer, records the $690 gain attributable to the boot as computed above and records the difference as an adjustment to the carrying value of its excavating equipment.
After recording the entries above, the carrying values of the exchanged equipment would be as follows:
Description ProExcavator QuickExcavator
Net book value exchanged $67,500 $75,000
Cash paid (received) $18,000 $(18,000)
Gain recognized 0 $ 690
Carrying value of asset received $85,500 $57,690