Exchanges of Nonmonetary Assets

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Exchanges of Nonmonetary Assets

• SFAS No. 153 Exchanges of Nonmonetary Assets

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Exchanges of nonmonetary assets

• Formerly had special rules for exchanges of
  similar assets
• Losses were recognized
• Gains were not recognized or only partially
  recognized (if boot cash was received)
• Those rules are now GONE
• Probably a good thing since the new rules are
  actually less complicated!

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From Kieso Update2 for 11th ed.
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SFAS No. 153 Exchanges of Nonmonetary Assets

• Nonmonetary exchanges are recognized at the fair
  value of the nonmonetary asset relinquished
  (unless fair value of asset received is more
  clearly evident)
• EXCEPTIONS
• 1. Fair value is not determinable for either
  asset
• 2. Exchange facilitates sales to customers.
• The transaction is 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.
• 3. The exchange lacks commercial substance.

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Commercial Substance

• A nonmonetary exchange has commercial substance
  if the entitys future cash flows are expected to
  significantly change as a result of the exchange.
  
• A significant change in future cash flows is
  defined to be meeting one or both of the
  following two conditions
• Configuration of cash flows is different
• The entity-specific value is different

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Examples (from KWW update)

• Two car rental companies swap Fords for Chevys
  equivalent models to increase variety of cars
  available
• Lacks commercial substance because the cash flows
  generated by rental activities will be
  substantially the same

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Car Rental Company Example

• The (loss)/gain will be recognized as the
  vehicles are used since depreciation expense will
  be higher (lower)

• Here is the JE that the company receiving the
  Chevys will make

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Car Rental Company Example

• Make the journal entry on the books of the
  company that receives the Fords (assume cost is
  200,000 and accumulated depreciation is 40,000)

• Ford automobiles 150,000Chevy
  automobiles 200,000Accd Depreciation
  40,000 Cash 10,000

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Changes in Principles, Estimates, Entities
Corrections of Errors

• SFAS No. 154 - Accounting Changes and Error
  Corrections

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Accounting Changes Corrections

• SFAS No. 154 discusses 3 types of accounting
  changes plus correction of errors
• Changes in Accounting Principle
• Changes in Accounting Estimates
• Changes in Reporting Entity
• Errors in Financial Statements

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SFAS No. 154 - Accounting Changes and Error
Corrections

• Issued May 2005 effective for fiscal years
  beginning after 12/15/2005
• Applies to VOLUNTARY changes in choice of
  accounting principle
• No more cumulative effect of change in accounting
  standards at bottom of income statement
• All changes in accounting principles would be
  handled through retroactive restatement of prior
  years
• Change previously reported numbers so that they
  now represent what the numbers would have been
  had the new principle been in use during that
  time period

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Some changes in principle a change in estimate

• A change in depreciation method is now considered
  a change in estimate and would not require
  retroactive restatement of prior years
• We already had the rule that if a change in
  principle cannot be distinguished from a change
  in estimate, it would be treated as a change in
  estimate
• Example Switch bad debt accounting from
  percentage of sales method to aging of accounts
  receivable (allowance) method

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Restatement Example

• SFAS No. 154, Appendix A
• Illustration 1 - detailed example of a change
  from LIFO to FIFO inventory method
• Shows extensive disclosures that would be needed
  to communicate impact on balance sheet, income
  statement, and statement of cash flows

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A simplification?

• Now all types of accounting changes are handled
  the same way retroactive restatement
• Only exception is when it is not practicable to
  determine impact on prior periods

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Asset Retirement Obligations

• FIN 47 - Accounting for Conditional Asset
  Retirement Obligations an interpretation of FASB
  Statement No. 143

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Do we need to review FAS 143?

• There are lecture notes on the notes page at
  the course web site
• Im not sure if there will be time to fit this
  topic in this semester but some of you have done
  a research case on AROs (in Acct 414 or 315)
• If you know nothing about this topic and want to
  do something for extra credit, ask about this case

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Asset retirement obligations

• FIN 47 (March 2005) would clarifies that a legal
  obligation to perform an asset retirement
  activity that is conditional on a future event is
  within the scope of FASB Statement No. 143
• Uncertainty surrounding the timing and method of
  settlement that may be conditional on events
  occurring in the future would be factored into
  the measurement of the liability rather than the
  recognition of the liability.
• If there is insufficient information to estimate
  the fair value, the liability would be initially
  recognized in the period in which sufficient
  information is available for an entity to make a
  reasonable estimate of the liabilitys fair
  value.

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ARO Examples

• Telephone company uses wood poles that are
  chemically treated
• No legal requirement to remove poles from ground
• However, if and when poles are removed from the
  ground, special disposal procedures are mandated
  by law
• An asset retirement obligation should be
  estimated at date of purchase

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ARO Example

• Facility currently owned contains asbestos
• Since acquisition, regulations are put into place
  that require special handling if building is
  renovated or demolished
• ARO should be recognized when regulations go into
  effect, if entity can reasonably estimate fair
  value of the liability