Exchanges of Nonmonetary Assets

1. Exchanges of Nonmonetary Assets SFAS No. 153 – Exchanges of Nonmonetary Assets

2. 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!

3. From Kieso Update2 for 11th ed.

4. 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.

5. Commercial Substance • A nonmonetary exchange has commercial substance if the entity’s 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

6. 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

7. 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 Chevy’s will make:

8. 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 200,000Acc’d Depreciation 40,000 Cash 10,000

9. Changes in Principles, Estimates, Entities & Corrections of Errors SFAS No. 154 - Accounting Changes and Error Corrections

10. 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

11. 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

12. 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

13. 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

14. 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

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

16. Do we need to review FAS 143? • There are lecture notes on the “notes” page at the course web site • I’m 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

17. 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 liability’s fair value.

18. 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

19. 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