CPA PEP Prep Forum: Technical question: Non-Monetary transaction

CPA PEP Prep Q&A

Technical question: Non-Monetary transaction

Hello,

Just wanted to ask if below would be technically correct under IFRS.

Case triggers non-monetary transaction issue for land exchange - giving up downtown land in exchange for industrial land for plant.

Both costs of asset given up / received are given.

Only estimated fair value are provided for both assets based on fair value of similar piece of land and back calculation with inflation rate from cost - appraiser can't conclude true fair value as no sales transaction has taken places for two years.

In this case, can I say: since the fair values of both assets can't be reliably measured, I will use cost to record transaction?

I see the situation is a little vague because the estimated fair value appears to be reasonable at some degree (but not completely).

Any advice would be greatly appreciated.

Thank you,

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Hey Hyun,

This NMT exchange doesn't appear to meet the 2nd criteria for exclusion at fair value since the exchange of assets are very similar in nature:

"The transaction is an exchange of product/property held for sale in the ordinary course of business to be sold in the same line of business to customers who are not parties to the exchange"

In this case the exchange are similar assets - the land.

Therefore, exclusion from fair value measurement is met and should be valued at carrying value.

Hope this helps,

Sarady

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Hi Sarady,

The exchange is in similar assets, i.e, land. However, this particular criterion for exclusion is available in case of ASPE, not sure if it is explicitly stated in IFRS.

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Hi Siddhartha,

Thanks for the clarification, I was solely looking at the perspective of ASPE. You are right and I need to go back to IFRS to see any differentiation.

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Hi Hyun,

As per IAS 16, non-monetary exchange of PPE is to be measured at fair value unless

1. Exchange lacks commercial substance, or

2. Fair value of neither the asset received or asset given up is reliably measureable.

The exchange of land in downtown for industrial land clearly changes the configuration of future cash flows.One assumes it must be significant as well due to inherent nature of the respective parcels of land. Hence the exchange has commercial substance.

As per Paragraph 26 of IAS 16,

“The fair value of an asset is reliably measurable if

(a) the variability in the range of reasonable fair value measurements is not significant for that asset or

(b) the probabilities of the various estimates within the range can be reasonably assessed and used when measuring fair value.”

As per paragraph 2.3 of Chapter 14 of Financial Reporting in CPA learning e-book, “In most cases, it is assumed that fair value can be reasonably estimated, and the lack of an exact dollar figure is not grounds to consider fair value immeasurable.”

Thus, it gives sufficient flexibility for FV of an asset to be considered as “reliably measurable”.

Given that estimated fair values could be arrived at for both assets, and in view of the above, the asset whose fair value could be ascertained more reliably should be used to record the transaction.

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