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Hello,
I have just covered Exchange of Assets.
My understanding is that where the Exchange has commercial substance, then on initial recognition, the acquired asset will be measured at its fair value , in the books of the receiver.
But if the Exchange lacks commercial substance, then on initial recognition, the acquired asset will be measured at the carrying value of the disposed asset , in the books of the receiver…it is this point i am interested in…..
For example, if Entity A transfers Asset Alpha to Entity B, which has a carrying value/market value of £1m and in return/exchange Entity B transfers Asset Beta to Entity A which has a carrying value/market value of £0.2m and lets assume that Entity A is a related party of Entity B. In my opinion the exchange lacks commercial substance as it is not an equal “swap”/”exchange”…so, Entity A will record Asset Beta , which it receives from Entity B, at a value of £1m (i.e. being the carrying value of the Asset Alpha exchanged )….How can this be right??? Asset Beta only had a carrying value of £0.2m prior to the Exchange, but now, Entity A will measure Asset Beta at £1m…..is this not overstating the value of an asset and a breach of the prudence concept???
I would appreciate your thoughts on the above
Thanks
LiamWhy do you suggest that the transaction lacks commercial substance? Do we always swap assets of equal value? If we exchange the asset for cash (£1m cash for a £0.2m asset) then the cash is the fair value of the asset and the asset given is not at the same value as the cash received, but we still recognise the £1m received.
Hello,
Thank you for prompt reply. I accept your point that we dont always swap assets of equal value.
But, if we assume that the scenario i gave in my original email did lack commercial substance, then the point i am interested in is, recording the received asset (i.e. Asset Beta) at the carrying value of the asset given up (i..e Asset Alpha)…….
Is it correct for Entity A to record Asset Beta at a value of £1m, being the carrying value of Asset Alpha, before it was exchanged….are we not overstating the carrying value of Asset Beta?? (given that it was being carried at £0.2m prior to the exchange occuring)
Thanks
Liam
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