Exchange of Similar Nonmonetary Assets

An exchange of similar nonmonetary assets is a transaction in which a business trades one non-cash asset for another of the same general type and use, such as a delivery truck for a newer delivery truck, one parcel of land for another, or inventory for inventory of the same line held for sale to customers. For many years US accounting gave these swaps special treatment: because the company was seen as continuing the same activity with a comparable asset, gains on the exchange were generally not recognized.

The idea dates from APB Opinion No. 29, issued by the Accounting Principles Board in 1973. It is now mainly of historical and exam interest, because the FASB replaced the similar-asset exception in 2004 with a commercial substance test, now found in ASC 845 of US GAAP. The term remains common in older textbooks and dictionaries, and its companion concept is the exchange of dissimilar nonmonetary assets.

Under APB 29, an exchange of similar productive assets was not considered the culmination of an earning process. The new asset was therefore recorded at the book value of the old one, adjusted for any cash paid, and any gain was deferred by reducing the cost of the new asset. Losses, however, were recognized immediately, consistent with the conservative instinct to report bad news promptly. If cash ("boot") was received in the exchange, a proportional part of the gain was recognized.

For example, suppose a company trades an old forklift with a cost of $40,000 and accumulated depreciation of $28,000 (book value $12,000), plus $20,000 cash, for a new forklift. The old forklift's fair value is $15,000. Under APB 29 the new forklift would be recorded at $32,000, which is $12,000 book value plus $20,000 cash, and the $3,000 gain would not appear on the income statement. Instead, it would be recognized gradually through lower depreciation expense on the new forklift over its life.

FASB Statement No. 153, effective for exchanges in periods beginning after 15 June 2005, removed the similar-asset exception to bring US rules closer to IFRS. Now every nonmonetary exchange is measured at fair value unless one of a few exceptions applies:

• The exchange lacks commercial substance, meaning the entity's future cash flows are not expected to change significantly as a result.
• Fair value of neither asset can be determined within reasonable limits.
• The exchange is of inventory to make sales to customers other than the parties to the exchange, a rule aimed at swaps between competitors that would otherwise inflate revenue.

In the forklift example, the newer machine will probably lift more, break down less and last longer, changing the company's cash flows, so the swap would likely have commercial substance. The new forklift would be recorded at $35,000, being $15,000 fair value plus $20,000 cash, and the $3,000 gain would be recognized immediately.

The older rule let companies hide gains and was easy to manage, since "similar" was a matter of judgment. It also differed from IFRS, where IAS 16 already applied a commercial substance test to fixed assets. Exchanges that lack commercial substance are still recorded at book value today, so the old logic survives in a narrower form. Accountants should also remember that tax rules are separate: in the United States, Section 1031 like-kind treatment now covers only real property, so a swap of vehicles or machinery can produce a taxable gain or capital loss even when the book entry is straightforward. Proper records of fair value support both the journal entry and any later impairment review.