Understanding the Accounting Treatment for Exchange of Nonmonetary Assets in Business Transactions

The gain or loss on a normal exchange of nonmonetary assets equals the difference between fair value and book value of the asset given up.

True

The above statement is generally true, as it represents the accounting treatment for the exchange of nonmonetary assets between two parties. When there is an exchange of nonmonetary assets, the gain or loss is computed by taking the difference between the fair value of the asset received and the carrying value of the asset given up.

For example, suppose that a company trades its old computer for a new one with a fair value of $3,000. The old computer has a carrying value of $1,500. To compute the gain or loss, we take the difference between the fair value and book value:

Fair value of the new computer received: $3,000
Carrying value of the old computer given up: $1,500
Gain on the exchange: $3,000 – $1,500 = $1,500

In this example, the company records a gain of $1,500 on the exchange of nonmonetary assets. If the fair value of the new computer was less than the carrying value of the old computer, then the company would have recorded a loss instead of a gain.

However, there are certain situations where the exchange of nonmonetary assets may not result in the recognition of a gain or loss. For example, if the exchange lacks commercial substance, then the company will not recognize a gain or loss. Similarly, if the exchange involves similar assets, and the fair value of the assets exchanged are roughly equal, then the company will not recognize a gain or loss on the exchange.

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