Company P exchanges a piece of manufacturing equipment (carrying amount $60,000, fair value $100,000) for a different piece of manufacturing equipment owned by Company Q (fair value $70,000), plus $30,000 cash paid by Company Q to Company P. The exchange has commercial substance. The $30,000 cash represents 30% of the $100,000 total fair value of the exchange. Under ASC 845, how does the size of the cash portion affect Company P's accounting for this exchange?
- Because the cash (boot) received is 30%, which is 25% or more of the fair value of the exchange, the exchange is considered a monetary transaction; Company P recognizes the entire $40,000 gain, not merely a proportional part of it, even though it also received a nonmonetary asset
- The 25%-or-more threshold is irrelevant here because the exchange already has commercial substance; commercial substance alone, independent of any boot percentage, is the only factor ASC 845 considers in determining how much gain to recognize
- Because the cash received is 30% of the fair value of the exchange, Company P must treat the transaction as entirely nonmonetary and defer the full $40,000 gain until the equipment received is subsequently disposed of
- The 25% threshold under ASC 845 caps the gain Company P can recognize at 25% of the total gain regardless of the actual proportion of cash received, so only $10,000 of the $40,000 gain is recognized immediately
Why A? And why not the others?
Correct answer: A. Because the cash (boot) received is 30%, which is 25% or more of the fair value of the exchange, the exchange is considered a monetary transaction; Company P recognizes the entire $40,000 gain, not merely a proportional part of it, even though it also received a nonmonetary asset
ASC 845-10-30 provides that when an exchange includes both a nonmonetary asset and monetary consideration (boot), and the boot is significant, defined as being 25 percent or more of the fair value of the exchange, both parties account for the entire transaction as if it were monetary rather than nonmonetary. Here the $30,000 of cash is 30% of the $100,000 fair value of the exchange, crossing that threshold, so Company P recognizes its full $40,000 gain (the $100,000 fair value of the equipment given up less its $60,000 carrying amount), rather than only a portion of it, even though part of what it received was another piece of equipment rather than cash. The option asserting that commercial substance alone governs ignores that the boot-percentage test is a separate, specific rule that applies in addition to the commercial-substance analysis and can itself convert what looks like a nonmonetary exchange into one accounted for as monetary. The option requiring full deferral of the gain describes the treatment for exchanges lacking commercial substance with little or no boot, which is the opposite of the facts here, where boot is significant and commercial substance is present. The option capping recognized gain at a fixed 25% fabricates a proportional-limitation rule; the 25% figure in ASC 845 is a threshold that determines whether the whole transaction is treated as monetary, not a ceiling on the percentage of gain recognized.
Source: FASB ASC 845-10-30 (nonmonetary transactions involving monetary consideration; the 25 percent boot threshold for monetary transaction treatment)