Acquisition by exchange of assets

Learning objectives

• Measure a property acquired in exchange for other assets and determine any resulting difference.L2, L3
• Calculate, from the case data, the amount relating to acquisition by exchange of assets and justify the basis of calculation.L2, L3
• Record the entry relating to acquisition by exchange of assets and state its effect on the financial statements.L2, L3

Normative references

• IAS 40 §27Property acquired in exchange for other assets: measured at fair value, unless the exchange transaction lacks commercial substance (para. 28) or the fair value of neither asset can be measured reliably (fallback to the carrying amount of the asset given up).
• IAS 40 §28Exchange of assets, commercial substance: the entity assesses the extent to which its future cash flows change as a result of the transaction. There is commercial substance if the configuration (risk, timing, amount) of the cash flows of the asset received differs from that of the asset transferred, or if the entity-specific value of the part of its operations affected by the exchange changes, and if that difference is significant relative to the fair value of the assets exchanged; the entity-specific value reflects post-tax cash flows, and the conclusion may be clear without detailed calculations.
• IAS 40 §29Exchange of assets: fair value is reliably measurable if the variability in the range of reasonable fair value measurements is not significant or if the probabilities of the various estimates within the range can be reasonably assessed; if the fair value of either asset is reliable, the fair value of the asset given up is used to measure cost unless the fair value of the asset received is more clearly evident. (The initial measurement of a right-of-use asset is set out in para. 29A, not in para. 29.)

Original summaries of the paragraphs (reference register), never a quotation of the standard.

4 questions

• An investment property acquired in exchange for another asset is measured at the carrying amount of the asset given up, even when the exchange has commercial substance and the fair value of the asset given up is reliably measurable.L2
• Marvel exchanges a plot of land (carrying amount {carrying_amount_given_up}, fair value {fair_value_given_up}) for a building to be leased, and pays an additional {cash_paid} in cash. The exchange has commercial substance (case data). Calculate the cost of the investment property acquired.L3
• Pivane exchanges an owner-occupied building (carrying amount 750,000, fair value 820,000) for an investment property. The expected cash flows are not changed: the exchange lacks commercial substance (case data). No cash is paid. At what amount is the property acquired recognised?L3
• Draco SA gives up land with a carrying amount of 600,000 in exchange for a building that it will hold as investment property (case facts). The exchange has commercial substance. The fair value of the land, 900,000, is reliably measurable; that of the building received, estimated at 950,000, is not more clearly evident than that of the land (data and judgement given by the case). What initial cost does Draco use for the building?L3