Nonmonetary Exchanges – New Standard – (1 of 2)

In December 2005 the Financial Accounting Standards Board (FASB) issued FAS #153: Exchanges of Nonmonetary Assets. This statement amended certain provisions of APB Opinion No. 29, Accounting for Nonmonetary Transactions.

This new standard is effective for organizations (churches/ministries) with years ending after June 15, 2006. The statement addresses how to calculate a gain/loss from a non-monetary exchange. FAS #153 defines an exchange (or exchange transaction) as a reciprocal transfer between an enterprise and another entity that results in the enterprise's acquiring assets or services or satisfying liabilities by surrendering other assets or services or incurring other obligations. One of the most common nonmonetary exchanges involves trade-in allowances on vehicles.

Under this new standard, a nonmonetary exchange shall be measured based on the recorded amount (after reduction, if appropriate, for an indicated impairment of value) of the nonmonetary asset(s) relinquished and not on the fair values of the exchanged assets, if any of the following conditions apply:
a. Fair value is not determinable
b. Exchange transaction to facilitate sales to customers
c. Exchange transaction that lacks commercial substance.

A nonmonetary exchange has commercial substance if the entity’s future cash flows are expected to significantly change as a result of the exchange. The entity’s future cash flows are expected to significantly change if either of the following criteria is met:
a. The configuration (risk, timing, and amount) of the future cash flows of the asset(s) received differs significantly from the configuration of the future cash flows of the asset(s) transferred.
b. The entity-specific value of the asset(s) received differs from the entity-specific value of the asset(s) transferred, and the difference is significant in relation to the fair values of the assets exchanged.

Remember application of this new standard applies to material items. Earlier application of the standard is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning January 2006 and shall be applied prospectively.

For an example of calculating a nonmonetary exchange based on this new standard, see post 2.