[etg1991]

Can someone explain to me what how gain is recognized when there’s no commercial substance and boot (cash) is paid? I’m using Becker and Wiley and they both disagree here.

Becker says: Boot paid = No gain if less than 25%.
Boot paid and it’s more than 25%, then both parties account for the transaction as a
monetary exchange and the gain is fully recognized.

Wiley says: Boot paid = No gain, period.

I like Wiley’s approach more (it’s obvious lol), but the reality is different. Please, advise! Thanks!

[DocJ]

I have Wiley too and specifically recall Pam mentioning something about 25%. So I'm almost positive something 25% applies here

The main thing is that, for there to be Commercial Substance, there must be a change of cash flows. A change in cash flow only happens when there's a SIGNIFICANT change in dollar amounts or risk or whatever. You can't just have two companies switch similar trucks and call that a full-on transaction, that would be a sham because it's not like you got an entirely new asset or whatever. In the grand scheme, it's still the same sorta thing.

Hence the 25% rule. If the exchange results in <25% of the cash compared to the asset's Fair Value, then you account for whatever that actual percentage amount was. If it's >25%, then it's like “screw it, just recognize the entire gain, it's SIGNIFICANT enough.”

…At least I think that's it.

[etg1991]

Right, but that's only when cash is received, not paid. I think Wiley has it right. No gain should be recognized when cash has been paid and there's no commercial substance. The 25% rule should only apply when cash is received. Thank you for replying!

[Biff Tannen]

Literally got 0 questions on this topic. I’d focus more on NFP if I were in your shoes.

[DocJ]

“Literally got 0 questions on this topic.”

Really? I specifically remember a couple on mine.

[CPAHOPE]

You got to know everything. Look at my horrendous score n yet i got comparable on govt n nonprofit

[etg1991]

@LIFO the party – that's not a great advice tbh. I took and failed FAR in Q4 2019 and yes, I got over 80% of my questions on NFP and Gov and when I got my form back it said I did stronger compared to people who passed with 75-80. That means nothing if the other areas are weak. You literally have to study everything. Friends who took the exam in Q3 got 2-5 questions in Gov and NFP. The exams change every quarter, you never know what they are focusing on.

[AusNat]

I think the texts don't explain this well. I remember thinking that when I read Becker's explanation.

If the cash involved is more than 25% of the total consideration, then you just treat the transaction as a monetary exchange. Basically, ditch the nonmonetary transaction rules in this case. Both parties recognize all of the gain or loss involved.

If the cash is less than 25%, then you use the nonmonetary exchange rules. The party giving cash doesn't recognize any gain (but does recognize loss if applicable) and the party receiving cash recognizes gain in proportion to the cash paid relative to the total consideration.

[thisismyname]

I don't remember any non-monetary transactions either on my exam, but nonetheless if the text covers it you should be familiar with the topic.

Nonmonetary Exchanges

[Josephine]

I have Gleim and it says, “If boot constitutes 25% or more of the fair value of the exchange, the exchange is treated
as a monetary exchange. Both parties record the transaction at fair value and recognize
any gain or loss in full.”

If the boot does not constitute 25% or more of the fair value, then it is treated as nonmonetary exchange. The parties measure the assets at the carrying amount and only recognize only a partial gain.

I think Gleim does a good job at explaining nonmonetary exchanges.

This is copied from my Gleim book:

“If boot is given as part of an exchange measured at carrying amount, the recipient of the boot must recognize a proportionate amount of any potential gain. The amount of gain is calculated in the following steps:

1) Calculate the total potential gain on the exchange.

Fair value of asset(s) received + boot received – carrying amount of asset(s) given up = total potential gain

2) Calculate the proportion of assets received represented by boot.

Boot Received/FV of asset(s) received + boot

(This is where you will determine whether the boot constitutes 25% or more of the FV)

3) Determine the amount of gain to be recognized.

Total potential gain + proportion represented by boot = recognized gain”

Hope that helps! I would love to send you the outline I have on this topic but I can't attach anything.

[Author]

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