ASC 845 Nonmonetary Transactions
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ASC 845

Active

Nonmonetary Transactions

Addresses the accounting for nonmonetary transactions, including exchanges of assets and nonreciprocal transfers.

Issued
Dec 1978
Latest amendment
Jan 2017
1

Conceptual Framework Linkage

Exchanges without cash – did economic substance actually change?
Most transactions involve cash or a monetary receivable/payable, making measurement straightforward. NONMONETARY transactions – exchanging one nonmonetary asset for another, or distributing nonmonetary assets to owners – raise a genuine question: has the entity's economic position actually CHANGED enough to justify recognising a gain or loss, or is this merely a continuation of the same underlying investment in a different form? ASC 845 answers this through the COMMERCIAL SUBSTANCE test (Section 4).
2

Scope

Exchanges and nonreciprocal transfers of nonmonetary assets
ASC 845 covers NONMONETARY EXCHANGES (trading one nonmonetary asset – e.g. property, inventory, equipment – for another) and NONRECIPROCAL TRANSFERS (distributing or receiving nonmonetary assets without an exchange, such as a dividend paid in the form of property rather than cash).
3

General Measurement Principle – Fair Value

Recorded at fair value, with gain/loss recognised
As a GENERAL rule, nonmonetary exchanges are measured at the FAIR VALUE of the asset(s) GIVEN UP (or the asset(s) RECEIVED, if that fair value is MORE CLEARLY EVIDENT) – with any difference between fair value and the asset's CARRYING amount recognised as a GAIN or LOSS. This treats the exchange as if the entity effectively SOLD the old asset at fair value and then PURCHASED the new one.
4

The Commercial Substance Test – the Carryover Basis Exception

No genuine change in economic position, no gain recognised
If an exchange LACKS "commercial substance" – meaning the entity's FUTURE CASH FLOWS are NOT expected to change significantly as a result of the exchange – the transaction is instead recorded at the CARRYOVER (existing carrying amount) basis of the asset given up, with NO gain recognised (a loss would still generally be recognised, consistent with the conservatism inherent in impairment principles). A transaction generally has commercial substance if the RISK, TIMING, or AMOUNT of the entity's future cash flows is expected to change meaningfully as a result. This carryover-basis exception prevents entities from generating artificial "gains" simply by swapping economically similar assets.
5

Nonreciprocal Transfers

Dividends in kind and contributions
A NONRECIPROCAL transfer – such as a dividend distributed to shareholders in the form of nonmonetary property, rather than cash – is generally measured at the FAIR VALUE of the asset transferred, with a GAIN OR LOSS recognised for the difference between fair value and the asset's carrying amount at the distribution date, similar in spirit to a sale followed by a distribution of the proceeds.
6

Worked Example – an Exchange With Commercial Substance

Recognising a gain
Example: Trading a delivery truck for a forklift
An entity exchanges a delivery truck (carrying amount $30,000, fair value $45,000) for a forklift used in a different part of its operations with materially different cash flow characteristics (fair value also $45,000). The exchange is expected to meaningfully change the timing and amount of the entity's future cash flows.
Since the exchange HAS commercial substance, the truck is treated as effectively SOLD at its $45,000 fair value: recognise a GAIN of $45,000 − $30,000 = $15,000. The forklift is recorded at its $45,000 fair value.
7

Worked Example – an Exchange Lacking Commercial Substance

Carryover basis, no gain recognised
Example: Swapping similar inventory between distributors
Two beverage distributors, each facing a temporary local shortage, swap similar quantities of the same product in different markets to meet customer demand – the swap has no expected effect on either entity's future cash flows, since each simply continues selling the same product at the same margins.
Since the exchange LACKS commercial substance, the inventory received is recorded at the CARRYOVER (existing carrying amount) basis of the inventory given up – NO gain is recognised, even if the exchanged quantities happen to have differing fair values.
8

Disclosure Requirements

What ASC 845 requires
Nature of nonmonetary transactions, the basis of accounting for assets transferred, and gains/losses recognised
9

Critical Judgments & Estimates

Where judgement matters most
SIGNIFICANT JUDGEMENTS
Whether an exchange has commercial substance, i.e. whether future cash flows are expected to change significantly
SIGNIFICANT ESTIMATES
Fair value of the nonmonetary assets exchanged, where not otherwise readily determinable
10

ASC 845 vs IAS 16 – Comparison

Comparison – ASC 845 vs IAS 16's exchange of assets guidance
FeatureUS GAAP (ASC 845)IFRS (IAS 16)
General measurement basisFair value, gain/loss recognisedFair value, gain/loss recognised – converged
Commercial substance exceptionCarryover basis if lacking commercial substanceSame broad commercial substance test and carryover-basis exception – converged core concept
The core "commercial substance" test and its carryover-basis consequence are broadly CONVERGED between the two frameworks – this is one of the narrower Topics where the general principle travels well across both sets of standards.
11

Statement Mapping

Where every ASC 845 event lands
EventStatement(s) affectedNotes
Exchange with commercial substanceBS ISGain/loss recognised, new asset at fair value
Exchange lacking commercial substanceBSCarryover basis, no gain recognised
12

Related Topics

Cross-reference map
TopicConnection
ASC 360Property, Plant & Equipment – supplies the carrying amount basis used in nonmonetary exchange gain/loss calculations
ASC 820Supplies the fair value measurement framework applied when fair value must be determined
13

Glossary

Commercial substance
A determination of whether an entity's future cash flows are expected to change significantly as a result of a nonmonetary exchange.
Nonreciprocal transfer
A one-directional transfer of nonmonetary assets, such as a dividend distributed in kind, without an exchange in return.
Carryover basis
Recording an asset received in an exchange at the existing carrying amount of the asset given up, used when the exchange lacks commercial substance.
Financial statement key
BS Balance sheet
IS Income statement
SE Statement of changes in equity
OCI Other comprehensive income
SCF Statement of cash flows