[Bonk]

For exchanges of nonmonetary asset, how does GAAP prevent businesses from continuously making exchanges each year allowing them write off their accumulated depreciation and receive a gain? It seems that a business could easily skew the financial statements for the year by calling up their buddy and making an exchange to quickly increase their net assets and income. Am I not understanding this concept correctly, or is this just a tricky loophole businesses can do? Is it something to do with future depreciation expenses that make up for the gain? Confusing!!

FAR: 85
BEC: 84
AUD: 74, 83
REG: ??

[Anonymous]

1. There is usually a winner and a loser. No one wants the wrong end of that stick.

2. Buddy probably means related party transaction. Whole new set of rules.

3. Swapping assets frequently might make a bank nervous about lending them money.

4. Unless the person swapping assets with you is in the same business (i.e. your competition) it wouldn't make sense to swap a printing machine for a dump truck.

[Bonk]

Thanks! I was thinking related parties might come into play. The way Gleim puts it simply sounds like you could swap an asset with your Mexico division every year and both win! Makes more sense now.

FAR: 85
BEC: 84
AUD: 74, 83
REG: ??

[greg2015]

The GAAP guidance for nonmonetary exchanges says that the transactions have to have commercial substance, otherwise, you must record it at book value. Swapping assets merely for accounting purposes wouldn't qualify as commercial substance and therefore should not result in any gains or losses.

AUD: 99
FAR: 95
BEC: 89
REG: 87

AICPA Ethics: 91

Licensed Illinois CPA

[Author]

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