Nonmonetary Exchanges: Definition, Accounting Treatment, and Financial Reporting

Nonmonetary exchanges occur when companies exchange goods, services, or assets without receiving cash or other monetary consideration, or when the cash involved is insignificant relative to the total value exchanged.

This article explains the definition, recognition rules, measurement, and reporting of nonmonetary exchanges under U.S. GAAP (ASC 845) and IFRS (IAS 16, IAS 38), with practical examples and journal entries.

1. What Is a Nonmonetary Exchange?

A nonmonetary exchange involves:

✦ Transfer of assets or services without significant cash consideration

✦ Both parties exchanging assets intended for productive use, sale, or investment

✦ Typically involving property, plant, equipment, or intangible assets

Examples include:

✦ Exchanging trucks between companies

✦ Swapping equipment to better align with operational needs

✦ Trading broadcasting rights or licenses

2. Key Considerations in Nonmonetary Exchanges

To properly account for a nonmonetary exchange, evaluate:

✦ Commercial Substance — Will future cash flows change significantly as a result of the exchange?

✦ Fair Value Measurement — Can the fair values of assets given up or received be reliably measured?

✦ Boot (Cash) Involvement — Is a small amount of cash ("boot") involved alongside the asset swap?

The answers determine whether the exchange should be accounted for at fair value or carrying amount.

3. Accounting Treatment Under U.S. GAAP (ASC 845)

A. Exchange Has Commercial Substance

✦ Recognize gains or losses immediately.

✦ Measure new asset at fair value of asset given up (or asset received, if more reliable).

B. Exchange Lacks Commercial Substance

If the exchange does not significantly change the entity’s future cash flows:

• No gain is recognized, unless boot is received.

• New asset is recorded at carrying amount of old asset plus/minus any cash paid/received.

C. Small Amount of Boot Received

✦ If cash received is less than 25% of total fair value exchanged: Recognize a proportional gain.

✦ If cash received is 25% or more: Recognize the full gain.

4. Practical Examples of Nonmonetary Exchanges

Example 1 – Exchange with Commercial Substance

Company A exchanges Equipment X (carrying amount $30,000, fair value $40,000) for Equipment Y.

Journal Entry:

Debit: Equipment Y – $40,000

Credit: Equipment X – $30,000

Credit: Gain on Exchange – $10,000

Explanation: The fair value approach applies because future cash flows will change significantly.

Example 2 – Exchange Lacking Commercial Substance (No Boot)

Company B swaps a truck (carrying value $20,000; fair value $22,000) for another similar truck.

✦ No significant cash flow change.

✦ No boot involved.

Journal Entry:

Debit: New Truck – $20,000

Credit: Old Truck – $20,000

Explanation: Carrying value is maintained; no gain recognized.

Example 3 – Exchange with Boot Received

Company C exchanges machinery (carrying value $50,000; fair value $60,000) for similar equipment plus $5,000 cash.

• Total fair value received = $55,000

• Boot = $5,000 ÷ ($55,000) ≈ 9% (<25%)

Gain Calculation:

• Total gain = $60,000 – $50,000 = $10,000

• Recognized gain = $10,000 × ($5,000 ÷ $55,000) ≈ $909

Journal Entry:

Debit: New Equipment – $50,000

Debit: Cash – $5,000

Credit: Old Equipment – $50,000

Credit: Gain on Exchange – $909

5. IFRS Treatment for Nonmonetary Exchanges

Under IFRS (IAS 16 and IAS 38):

✦ Measure the acquired asset at fair value if: The exchange has commercial substance, and The fair value can be reliably measured.

✦ If not, measure the new asset at the carrying amount of the asset given up.

✦ Boot (cash) rules are less rigid under IFRS — gains are not proportionally recognized; they are recognized only if fair value is reliable and the exchange has commercial substance.

6. Commercial Substance: How to Evaluate

An exchange has commercial substance if:

✦ The configuration (risk, timing, or amount) of cash flows differs significantly

✦ The entity’s economic position changes significantly

If neither party’s future cash flows will differ materially, the exchange likely lacks commercial substance.

7. Financial Statement Presentation

✦ Balance Sheet: New asset recorded at fair value or carrying amount (depending on substance).✦ Income Statement: Recognized gains or losses impact current period income if the exchange has commercial substance.

Disclosures should explain:

✦ Nature of the nonmonetary transaction

✦ Basis for recognizing gains or losses

✦ Whether the fair value could not be reliably determined

8. Summary of Accounting Treatment

Exchange Type	Accounting Treatment
Has commercial substance	Record new asset at fair value; recognize gains/losses
No commercial substance (no boot)	Record new asset at carrying value; no gains recognized
No commercial substance (small boot received)	Recognize proportional gain
Significant boot received (>25%)	Recognize full gain