An exchange of dissimilar nonmonetary assets is a transaction in which a business gives up one non-cash asset and receives a different kind of non-cash asset in return, sometimes with a small amount of cash added. A trucking company that trades a delivery van for a parcel of land, or a farmer who swaps a tractor for a storage building, is exchanging dissimilar assets. Nonmonetary assets are those whose value in money is not fixed, such as inventory, equipment, buildings and land, as opposed to monetary items like cash and receivables.
The phrase comes from APB Opinion No. 29, issued by the Accounting Principles Board in 1973, which split asset swaps into "similar" and "dissimilar" exchanges. Today the rules sit in ASC 845 of US GAAP, and the deciding test is whether the exchange has commercial substance rather than whether the assets look alike.
How the accounting works
A swap of dissimilar assets is treated as the end of one earning process and the start of another, so it is accounted for like a sale followed by a purchase. The asset received is recorded at the fair value of the asset given up, unless the fair value of the asset received is more clearly evident. Any difference between that fair value and the book value of the asset given up is recognized as a gain or loss on the income statement in the period of the exchange. This departs from the ordinary cost principle only in the sense that the "cost" of the new asset is measured by what was given up.
Worked example
A company owns a machine that originally cost $80,000 and has accumulated depreciation of $50,000, giving a book value of $30,000. It trades the machine, plus $5,000 in cash, for a small warehouse. An appraisal puts the machine's fair value at $38,000.
- The warehouse is recorded at $43,000, which is the $38,000 fair value of the machine plus the $5,000 cash paid.
- Accumulated depreciation of $50,000 is debited to remove it, and the machine's cost of $80,000 is credited.
- Cash is credited for $5,000.
- A gain of $8,000 is credited, being the $38,000 fair value less the $30,000 book value.
The journal entry balances at $93,000 of debits and credits. Had the machine's fair value been only $26,000, the company would instead record a $4,000 loss and the warehouse at $31,000.
Commercial substance replaced the similar-versus-dissimilar test
In December 2004 the FASB issued Statement No. 153, which amended APB 29 for periods beginning after 15 June 2005. It removed the special treatment for exchanges of similar productive assets and replaced it with a single question: does the exchange have commercial substance? An exchange has commercial substance when the future cash flows of the entity are expected to change significantly, in amount, timing or risk, as a result of the swap. Most exchanges of genuinely different assets pass that test, which is why the older "dissimilar" label still lines up with fair-value accounting in practice. Exchanges that lack commercial substance, or where fair value cannot be measured reliably, are recorded at book value with no gain.
Under International Financial Reporting Standards, IAS 16 for fixed assets and IAS 38 for intangible assets apply a very similar commercial-substance test, so results under the two frameworks are usually close. Points that commonly cause errors include using a seller's asking price instead of a supportable fair value, forgetting to remove accumulated depreciation, and failing to record depreciation on the old asset up to the date of the exchange. For tax purposes in the United States, the like-kind exchange rules in Section 1031 now apply only to real property, so a swap of equipment is usually taxable even when the accounting treatment differs.