Assets acquired in an exchange transaction

Assets acquired in an exchange transaction – Assets are usually acquired through an exchange transaction, which can be a monetary or a non-monetary exchange. The accounting for assets acquired in an exchange transaction including the recognition and measurement under IFRS is discussed in this session.

Initial recognition

An asset acquisition triggers the initial recognition of an asset acquired and may include a liability assumed. Assets are usually acquired through an exchange transaction, which can be a monetary or a non-monetary exchange. Assets surrendered are derecognized at the date of acquisition. If liabilities are incurred or equity interests are issued as the consideration for an acquisition of an asset or group of assets, those liabilities and equity interests are recognized at the date of acquisition at fair value. Assets acquired in an exchange transaction

Goodwill is not recognized in an asset acquisition. The presence of excess consideration transferred may indicate that not all assets acquired have been recognized or that there are pre-existing relationships being settled with the transaction that should be accounted for separately. As discussed in IFRS 3 B12, in the absence of evidence to the contrary, a particular set of assets and activities in which goodwill is present is presumed to be a business. AssAssets acquired in an exchange transactionets acquired in an exchange transaction

Initial measurement

Asset acquisitions are measured based on their cost to the acquiring entity, which generally includes transaction costs. An asset’s acquisition cost or the consideration transferred by the acquiring entity is assumed to be equal to the fair value of the net assets acquired, unless contrary evidence exists. Assets acquired in an exchange transaction

Under IAS 16 24, a gain or loss would be recognized by the acquirer if the fair value of non-monetary assets given as consideration was different than their carrying amounts.

Under IAS 28 28, a gain may be limited in situations when a non-monetary asset, for which the readily determinable fair value exceeds the carrying amount, is transferred to an entity in exchange for a non-controlling ownership interest in that entity and that ownership interest is accounted for under the equity method. Once control is transferred, any non-controlling interest received (or retained) is measured at fair value. Assets acquired in an exchange transaction

If the consideration transferred is cash, measurement is based on the amount of cash paid to the seller as well as transaction costs incurred. Consideration given in the form of non-monetary assets, liabilities incurred, or equity interests issued is measured based on either the cost to the acquiring entity or the fair value of the assets or net assets acquired, whichever is more clearly evident and, thus, reliably measurable, as described in IAS 16 24, and IAS 38 45. Assets acquired in an exchange transaction

There is a rebuttable presumption in IFRS 2 that the fair value of goods and services received can be reliably measured when consideration is given in the form of equity interests. In accordance with IFRS 2 13, the fair value of the equity interests issued as consideration can be used to determine the fair value of the consideration transferred only when this presumption is rebutted.

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Non-monetary transactions accounting

The accounting under IFRS for non-monetary exchanges is similar to current US GAAP. The cost of an item acquired in exchange for a non-monetary asset or assets is measured at fair value unless (1) the exchange transaction lacks commercial substance or (2) the fair value of neither the asset received nor the asset given up is reliably measurable. In accordance with IAS 16 24, if the acquired item is not measured at fair value, it is measured at the carrying amount of the asset surrendered. ContingenciesAssets acquired in an exchange transaction

Nonmonetary exchanges of items that are similar in nature and value are not measured at fair value and do not result in the recognition of gains and losses. However, items that are considered similar are generally limited to commodities like oil or milk, when suppliers exchange or swap inventories in various locations to fulfill demand on a timely basis in a particular location.

If the items exchanged are for dissimilar goods or services, the exchange is measured at fair value, resulting in the recognition of a gain or loss. An exchange is measured based on the fair value of the items received, adjusted by the amount of cash and cash equivalents transferred. When the fair value of the items received cannot be measured reliably, the exchange is measured based on the fair value of the items given up, adjusted by the amount of any cash or cash equivalents transferred. Assets acquired in an exchange transaction

Allocating cost (the fair value of consideration given)

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The cost of acquiring a group of assets is allocated to the individual assets within the group based on the relative fair values of the individual assets. Fair value is measured in accordance with IFRS 13, as applicable. Therefore, the fair value of the consideration transferred, including transaction costs, is generally allocated to the assets acquired and liabilities assumed based on their relative fair values.

However, if the fair values of the assets acquired and liabilities assumed are more reliably determinable, the cost of the transaction would be based on the fair values of the assets acquired and liabilities assumed, as described in IAS 16 24, and IAS 38 45. No goodwill is recognized in an asset acquisition. The following example demonstrates the allocation of cost in an asset acquisition. Assets acquired in an exchange transaction

EXAMPLE – Measurement of an asset acquisition

Company X acquires a custom special-purpose machine and a patent in exchange for consideration transferred of CU1,000 cash and a warehouse facility. The fair value of the warehouse facility is CU600 and its carrying value is CU100. The fair values of the special-purpose machine and patent are estimated to be CU750 and CU1,250, respectively. The special-purpose machine and patent relate to a product that has just recently been commercialized.

The market for this product is developing and uncertain. Assume Company X incurred no transaction costs. (For illustrative purposes, the tax consequences on the gain have been ignored.) Assets acquired in an exchange transaction

How should the asset acquisition be recorded? Assets acquired in an exchange transaction

Analysis Assets acquired in an exchange transaction

The cost of the asset acquisition is determined based on the fair value of the assets given, unless the fair value of the assets received is more reliably determinable. Company X concludes the fair value of the warehouse facility is more reliable than the fair value of the special-purpose machine and patent.

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The fair value of the consideration given is attributed to the individual assets acquired based on their relative fair values. Therefore, Company X would value the acquisition of the special-purpose machine and patent at CU1,600 (the total fair value of the consideration transferred). A CU500 gain is recorded by Company X for the difference between the fair value and carrying value of the warehouse facility. Assets acquired in an exchange transaction

The special-purpose machine and patent are recorded at their relative fair values. The entry to record the transaction would be: Assets acquired in an exchange transaction

Machine

CU600¹

Patent

CU1,000²

Cash

CU1,000³

Warehouse facility

CU100°

Gain on acquisition

CU500°

Notes:

1 The machine is recorded at its relative fair value ((CU750/CU2,000) × CU1,600 = CU600).Free Cash Flow calculated

2 The patent is recorded at its relative fair value ((CU1,250/CU2,000) × CU1,600 = CU1,000).

3 Company X paid cash consideration of CU1,000.

0 The carrying amount of the warehouse facility (CU100) is derecognized from the balance sheet and a gain is recorded for the difference between the carrying amount and the fair value at the date of derecognition (CU600 – CU100 = CU500).

Detailed explanations on accounting for an asset acquisition versus a business combination are provided here.

Accounting after acquisition

The subsequent accounting for an asset or liability is based on the nature of the asset and liability, not the manner of its acquisition. The basis for measuring the asset or liability, whether cost or fair value, has no impact on the accounting of the asset or liability after acquisition, as described in IFRS 3 54.

Acquisition of intangible assets disclosures

Specific disclosures for intangible assets acquired in a transaction other than a business combination are required. IFRS companies should follow the disclosure requirements of IAS 38 118-123 with respect to intangible assets acquired in an asset acquisition.

Assets acquired in an exchange transaction

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