This article describes how to recognize transactions that include non-cash components.
TIP: Non-Monetary transactions are frequently tested on the CPA Canada board exams (CFE Exams).
In general, when items are exchanged, companies must recognize the exchanges as real Revenues received and goods sold. Throughout the IFRS and ASPE guidance, there is the concept of "commercial substance." How a Non-Monetary transaction is measured is based on whether or not the transaction is considered to have commercial substance. A transaction has commercial substance when the company's future cash flows are expected to change significantly because of the transaction. In other words - the transaction has commercial substance if the company is expected to somehow benefit or lose money from this transaction.
IFRS:
IFRS does not have one specific section that describes how Non-Monetary transactions should be handled.
Revenue
IFRS 15, Paragraph 66 explains how to recognize Revenue for non-cash considerations:
If the entity receives a non-cash consideration for the goods/services, the entity will need to measure the revenues at Fair Value of what is received. If it is not possible to reasonably measure the fair value of what is received, then the revenue would be measured at the standard selling price for the good/service.
Property, Plant and Equipment
Additionally, IAS 16, Paragraph 24-26 provides specific guidelines for Property Plant and Equipment (PPE).
Cost of PPE Acquired:
The cost of PPE is measured at the fair value of the item, unless:
A) "the exchange transaction lacks commercial substance"
An exchange transaction has commercial substance if:
"the configuration (risk, timing and amount) of the cash flows of the asset received differs from the configuration of the cash flows of the asset transferred;" OR
"the entity-specific value of the portion of the entity's operations affected by the transaction changes as a result of the exchange;" AND
the difference in either of the above is significant relative to the fair value of the assets exchanged.
OR
B) "the fair value of neither the asset received nor the asset given up is reliably measurable." (IAS 16, Paragraph 25)
If the item acquired cannot be measured at fair value, its cost is measured at the carrying amount of the asset given up.
IMPORTANT: No matter the circumstance, you cannot record an asset that you acquired at more than its Fair Value. This is referred to as the "asset ceiling".
ASPE:
ASPE has a dedicated section for Non-Monetary transactions: ASPE 3831.
There are three basic steps in recognizing Non-Monetary transactions under ASPE.
Determine if the transaction meets the definition of a Non-Monetary transaction.
Determine whether or not the transaction has commercial substance.
Finally - determine which is the more reliable estimate to use for the transaction.
Does the transaction meet the definition?
ASPE 3831.05 provides guidance as to the definition of Non-Monetary transaction.
A Non-monetary transactions can be one of two things:
(i) Non-monetary exchanges: "which are exchanges of non-monetary assets, liabilities or services for other non-monetary assets, liabilities or services with little or no monetary consideration involved;" OR
(ii) Non-monetary non-reciprocal transfers: "which are transfers of non-monetary assets, liabilities or services without consideration." For example, a donation would be considered a Non-monetary, non-reciprocal transfer.
Does the transaction have commercial substance?
In order to determine how to measure the Non-Monetary transaction, we must first determine whether the transaction lacks commercial substance. ASPE 3831.11 provides the definition of commercial substance.
An exchange transaction has commercial substance if:
A) "the configuration of the future cash flows of the asset received differs significantly from the configuration of the cash flows of the asset given up;"
If any one of the following attributes differs significantly, it is considered to have an impact on the configuration of cash flows:
risk OR
timing OR
amount of the cash flows
OR
B) "the entity-specific value of the asset received differs from the entity-specific value of the asset given up, and the difference is significant relative to the fair value of the assets exchanged."
Once we have established whether or not the transaction has commercial substance, we can then determine how to measure the transaction.
How do we measure the transaction?
ASPE 3831.06 outlines how to measure the transaction.
The company will measure the asset received at whichever can be measured more reliably: Fair Value of asset given up or the Fair Value of the asset received.
However, if one of the following scenarios is true, then the asset acquired should be measured at the carrying amount of the asset given up.
"the transaction lacks commercial substance;" OR
"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;" OR
"neither the fair value of the asset received nor the fair value of the asset given up is reliably measurable."
In all cases, we should adjust for any cash received or given up during the transfer.
IMPORTANT: No matter the circumstance, you cannot record an asset that you acquired at more than its Fair Value. This is referred to as the "asset ceiling".
Summary
Non-monetary transactions can be confusing. The easiest way to approach these problems is to simply find the appropriate sections in the relevant accounting guidelines and follow through the sections.
A simpler method is to use the summary table, which can be found below.
The asset acquired is recorded at the following (adjusted for any cash received or given up in the transaction).
BV: Book Value
FV: Fair Value
IMPORTANT: No matter the circumstance, you cannot record an asset that you acquired at more than its Fair Value (the "asset ceiling").
Sample Journal Entries for Transactions with Commercial Substance
Gain on Exchange:
Loss on Exchange:
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