Company A exchanges a delivery truck (carrying amount $18,000, fair value $25,000) for a delivery truck owned by Company B (fair value $23,000) plus $2,000 cash paid to Company A. The exchange lacks commercial substance because the trucks perform the exact same delivery function in each company's fleet and neither company's future cash flows are expected to change as a result. Under ASC 845, how should Company A account for the truck received?
- Because cash was received, the exchange is automatically treated as if it had commercial substance regardless of any threshold, and Company A recognizes the entire $7,000 realized gain immediately
- Because the $2,000 cash Company A received is only 8% of the $25,000 total consideration received, below the 25% threshold at which a boot-inclusive exchange is treated as a monetary transaction, the exchange keeps its lacking-commercial-substance treatment: Company A recognizes a partial gain equal to the cash-received proportion of the $7,000 total realized gain, or $560, and records the truck received on a carryover-cost basis adjusted for the cash received
- Company A recognizes no gain at all, deferring the entire $7,000 realized gain into the basis of the truck received, because receipt of any cash in an exchange lacking commercial substance is disregarded up to the 25% threshold
- Company A records the truck received at its $23,000 fair value and recognizes a loss of $2,000, treating the cash received as a reduction of the truck's fair value rather than as boot within a nonmonetary exchange
Why B? And why not the others?
Correct answer: B. Because the $2,000 cash Company A received is only 8% of the $25,000 total consideration received, below the 25% threshold at which a boot-inclusive exchange is treated as a monetary transaction, the exchange keeps its lacking-commercial-substance treatment: Company A recognizes a partial gain equal to the cash-received proportion of the $7,000 total realized gain, or $560, and records the truck received on a carryover-cost basis adjusted for the cash received
ASC 845 provides that an exchange lacking commercial substance is generally recorded on a carryover-cost basis with no gain or loss recognized, but carves out an exception when the party receiving monetary consideration (boot) receives 25% or more of the total consideration received: in that case the entire transaction is treated as a monetary exchange and the full gain is recognized. Here Company A's $2,000 cash is only 8% of the $25,000 total consideration received (the $23,000 truck plus the $2,000 cash), well below the 25% threshold, so the exchange keeps its lacking-commercial-substance treatment, but the receipt of some cash still triggers partial gain recognition proportional to the cash portion: 8% of the $7,000 total realized gain ($25,000 fair value given up minus $18,000 carrying amount), or $560, with the remainder of the gain deferred into the recorded basis of the truck received. Treating any cash receipt as automatically converting the exchange into a commercial-substance transaction ignores the specific 25% threshold the guidance sets. Deferring the entire gain ignores that a cash-received boot below 25% still triggers a proportional, not zero, gain recognition. Recording a loss by treating the cash as reducing the received truck's fair value confuses monetary boot received within a nonmonetary exchange with an unrelated fair-value adjustment, which is not how boot is accounted for under this guidance.
Source: FASB ASC 845-10-30-1 through 30-3 (nonmonetary exchanges lacking commercial substance; the 25%-of-consideration boot threshold for partial gain recognition)