Exchange

PAS 16, Paragraph 24, provides that the cost of an item of

property, plant and equipment acquired in exchange for a
nonmonetary asset or a combination of monetary and
nonmonetary asset is measured at fair value.

However, the exchange is recognized at carrying amount

under the following circumstances:
a. The exchange transaction lacks commercial substance.
b. The fair value of the asset given or the fair value of the
asset received is not reliably measured.
 Definition of commercial substance
Commercial substance is a new notion and is defined as the event or
transaction causing the cash flows of the entity to change significantly by reason
of the exchange.
An exchange transaction has commercial substance when the cash flows of
the asset received differ significantly from the cash flows of the asset transferred.
In assessing whether this has occurred, the entity shall consider if the
amount, timing and risk of the cash flows from the new asset are different from
the cash flows of the old asset.

Moreover, the entity-specific value of the proportion of the entitys operations

affected by the transaction changes as a result of the exchange.

Entity-specific value is the present value of the cash flows an entity expects to arise
from the continuing use of an asset and from the disposal at the end of useful life
or expects to incur when settling a liability.
 Exchange- no cash involved

If a property is acquired in an exchange with commercial

substance and there is no cash involved, the cost is
measured at the following in the order of priority:

a. Fair value of property given

b. Fair value of property received
c. Carrying amount of property given
 Illustration
An investment in equity security with carrying amount P500,000 is exchanged for an equipment
with a fair value of P550,000. At the time of exchange, the investment has a fair value of
P530,000.
a. The fair value of investment is used (preferable):
Equipment 530,000
Investment in equity security 500,000
Gain on exchange 30,000
b. The fair value of equipment is used:
Equipment 550,000
Investment in equity security 500,000
Gain on exchange 50,000
c. The carrying amount of the investment is used:
Equipment 500,000
Investment in equity security 500,000

Note that if the exchange has commercial substance and is measured at fair value, any gain or loss on
the exchange is fully recognized.
 Exchange- cash is involved

If a property is acquired in an exchange and there is a

cash involved, the cost of the property is equal to the
following:

a. Fair value of asset given plus cash payment- on the

part of the payor.
b. Fair value of asset given minus the cash received-
on the part of the recipient.
 Exchange- no commercial substance

If the exchange transaction lacks commercial substance,

the acquired item of property, plant and equipment is
measured at the carrying amount of the asset given.

No gain or loss is recognized when the exchange lacks

commercial substance.

Of course, any cash involved is added to the carrying

amount on the part of the payor and deducted from the
carrying amount on the part of the recipient.