Non-monetary transactions IFRS 15
Barter transactions are the exchange of goods or services, in exchange for other goods or services
If an entity enters into a non-monetary exchange with a customer as part of its ordinary activities, then generally it applies the guidance on non-cash consideration in the IFRS 15 Revenue standard. Non-monetary transactions IFRS 15
Non-monetary exchanges with non-customers do not give rise to revenue. If a non-monetary exchange of assets with a non-customer has commercial substance, then the transaction gives rise to a gain or loss. The cost of the asset acquired is generally the fair value of the asset surrendered, adjusted for any cash transferred. Non-monetary transactions IFRS 15
Simple bartering involves no cost as this involves exchanging goods and/or services of the same value.
A barter exchange operates as a broker and bank in which each participating member has an account that is debited when purchases are made, and credited when sales are made. Compared to one-to-one bartering, concerns over unequal exchanges are reduced in a barter exchange.
The exchange plays an important role because it provides the record-keeping, brokering expertise and monthly statements to each member. Commercial exchanges make money by charging a commission on each transaction on either the buy or sell side, or a combination of both. Non-monetary transactions IFRS 15
In general, one requirement remains in tact in non-monetary transactions, revenue cannot be recognised if the amount of revenue is not reliably measurable. Non-monetary transactions IFRS 15
Non-monetary exchanges with customers
If an entity enters into a non-monetary exchange of goods or services with a customer (other than a counter-party in the same line of business – see below) as part of its ordinary activities, then it applies the guidance on non-cash consideration in the revenue standard. [IFRS 15, IAS 1.34] Non-monetary transactions IFRS 15
Non-cash consideration received from a customer is measured at fair value. No specific guidance is provided in respect of the measurement date for non-cash consideration. Therefore, it appears that an entity should apply judgement, based on the relevant facts and circumstances, to determine whether to measure non-cash consideration with reference to the date on which the contract is entered into, the date it is received or the date the performance obligation is satisfied. If an entity cannot make a reasonable estimate of the fair value, then it refers to the stand-alone selling price of the promised goods or services. [IFRS 15.66–67, BC254A–BC254E] Non-monetary transactions IFRS 15
If an entity enters into a non-monetary exchange with a counter-party in the same line of business to facilitate sales to (potential) customers, then it does not recognise revenue for the transaction and the accounting is the same as for exchanges with non-customers (see below). [IFRS 15.5(d)] Non-monetary transactions IFRS 15
Property, plant and equipment
Sometimes a customer transfers property, plant and equipment to an entity that will use the contributed assets to connect the customer to a network or provide it with ongoing services. If the entity obtains control of the contributed assets, then it applies the guidance on non-cash consideration in the revenue standard (see above).
Cash flow Disclosures
Non-cash investing or financing transactions (e.g. shares issued as consideration in a business combination) are not included in the statement of cash flows, but are disclosed. [IAS 7.43–44] Non-monetary transactions IFRS 15
Other non-monetary exchanges
Non-monetary exchanges with non-customers do not give rise to revenue. [IFRS 15.5]
If a non-monetary exchange of assets with a non-customer has commercial substance, then the transaction gives rise to a gain or loss. The cost of the asset acquired is generally the fair value of the asset surrendered, adjusted for any cash transferred. [IAS 16.24, IAS 38.45, IAS 40.27]
If a non-monetary exchange of assets lacks commercial substance or if the fair value of neither the asset received nor the asset given up is reliably measurable, then no gain is recognised; instead, the acquired asset is recognised initially at the carrying amount of the asset surrendered. [IAS 16.24, IAS 38.45, IAS 40.27]
An exchange transaction has ‘commercial substance’ if:
- the configuration of the cash flows (i.e. the amount, timing and uncertainty) of the assets received and transferred is different; or Non-monetary transactions IFRS 15
- the entity-specific value of the portion of the entity’s operation affected by the transaction changes as a result of the exchange; and Non-monetary transactions IFRS 15
- the difference in both of the above situations is significant when compared with the fair value of the assets exchanged. [IAS 16.24, IAS 38.45, IAS 40.27] Non-monetary transactions IFRS 15
Assets received from government
Assets received from owners
Assets or resources transferred to an entity by a shareholder for no consideration are normally equity contributions that are recognised directly in equity (See Equity and financial liabilities). Non-monetary transactions IFRS 15
Accounting for Barter Credits
When a company enters into a barter transaction, two things need to be addressed from an accounting standpoint. First, the exchange transaction needs to be accounted for properly. Second, the recorded amount of unused barter credits has to be evaluated at each financial statement reporting date. Non-monetary transactions IFRS 15
1. Recording the Exchange Transaction
The basic principle is that accounting for non-monetary transactions should be based on the fair values of the assets or services involved. (This excludes situations where the exchange is not the culmination of an earning process, in which case the recorded amount of the asset surrendered should be used). Non-monetary transactions IFRS 15
The transaction is generally measured based on the fair value of the asset surrendered. The fair value of the asset surrendered becomes the cost basis of the asset acquired. A gain or loss should be recognized based on the difference between the fair value of the asset surrendered and its carrying amount. Non-monetary transactions IFRS 15
The fair value of the asset received in an exchange should be used to record the transaction only if it is more clearly evident than the fair value of the asset surrendered. In the case of barter credits, it should be presumed that the fair value of the asset exchanged is more clearly evident than the fair value of the barter credits received. Non-monetary transactions IFRS 15
Accordingly, the barter credits received should be recorded at the fair value of the asset exchanged. That presumption might be overcome if the barter credits can be converted into cash in the near term, or if independent quoted market prices exist for items to be received in exchange for the barter credits. Non-monetary transactions IFRS 15
When determining the fair value of the asset surrendered, it should be presumed that the fair value of the asset does not exceed its carrying amount, unless there is persuasive evidence supporting a higher value.
When determining the value of inventory or other assets exchanged in a barter transaction, skepticism should be used. The reality is that the company would prefer to sell the inventory for cash rather than barter credits.
The fact that the company is bartering with inventory could indicate that the company’s normal selling price may not be an accurate measure of fair value. This could also raise lower-of-cost-or-market valuation questions about any items remaining in inventory.
If the fair value of the asset exchanged is less than its carrying amount, an impairment should be recognized prior to recording the exchange. For example, inventory exchanged in a barter transaction should be adjusted to the lower of cost or market prior to recording the barter transaction. In the case of non-current assets, impairment should be measured and recognized in accordance with IAS 36. Non-monetary transactions IFRS 15
2 Evaluating the Recorded Amount of Barter Credits
At each balance sheet date, the recorded amount of barter credits should be evaluated for impairment. An impairment loss should be recognized if the fair value of any remaining barter credits is less than the carrying amount, or if it is probable that the company will not use all of the remaining barter credits. Non-monetary transactions IFRS 15
The first step in evaluating the realizability of barter credits is to evaluate the likelihood that the counter-party will perform. If the credits are directly with another entity that will provide the goods or services, that entity should be evaluated.
This can be done by investigating the credit rating of that entity and obtaining references from other companies that have been involved in similar transactions with the entity. If the credits are with a barter broker or network, the credibility and history of the broker or network should be evaluated. Non-monetary transactions IFRS 15
This can be done by contacting the International Reciprocal Trade Association (www.irta.net) or similar organizations.
The next step is to evaluate, based on current and future operations, whether the company is expected to fully utilize the recorded amount of the credits. For example, if a company has available $100,000 of advertising credits, but typically spends only $5,000 on advertising each year, it might take 20 years to fully utilize the credits. Non-monetary transactions IFRS 15
Similarly, credits may allow the company to purchase whatever goods or services happen to be available from members of the network, and it may be uncertain whether the company will ever need any of them. Barter credits may also have a contractual expiration date, at which time they become worthless. Non-monetary transactions IFRS 15
Finally, some arrangements may require the payment of cash in addition to barter credits, in which case the ability of the company to use the credits may be limited. Non-monetary transactions IFRS 15
How a Barter Transaction Works
Here are some plain examples of how barter transactions work Non-monetary transactions IFRS 15
- In a typical barter transaction, a printer uses down time on his presses to do a $3,000 printing job for a member of the network. Non-monetary transactions IFRS 15
- The trade dollars the printer earned are spent on landscaping by a landscaper in the network.
- Using the $3,000 of trade dollars, the landscaper buys $3,000 worth of radio advertising.
- Meanwhile, the radio station, whose air time the landscaper bought, uses the trade dollars earned in this transaction for air-plane tickets to be used in an incentive program for its top ad representatives.
Advantages in working Barter trades
- Cash conservation. Paying for business expenses with trade dollars leaves more cash available for the payment of strictly cash expenses. Non-monetary transactions IFRS 15
- Barter lines of credit. Barter can be particularly useful when a business needs to borrow money to relocate, expand or launch a marketing program. A barter line of credit may be easier to get than bank credit because barter exchange networks look at a company’s capacity to pay back through demand in the network rather than through traditional collateral. Many of the products and services associated with moving, remodeling or marketing are available in barter exchange networks. Interest on barter lines of credit is paid in trade dollars. Non-monetary transactions IFRS 15
- Marketing advantage. Because barter purchases represent lower out-of-pocket cash costs, trade dollars often can be earned with little increase in overhead and without advertising or marketing expense.A barter network keeps clients informed of new products and services available for barter. Some networks hold events such as holiday shows, where clients have an opportunity to meet each other and examine each others products or services.A further advantage of barter arises directly from the makeup of barter exchange networks. Because radio, television and print media companies can run additional advertising spots or ads with little increase in overhead, they often participate in exchange networks. This means network clients can finance ad campaigns by paying with their own products or services.
- Help with collection. Businesses can use barter to get value out of otherwise uncollectible debts. Instead of chasing cash, which might be nonexistent, the creditor can give the debtor company the option to pay with its product or service. That product or service is placed in the barter exchange network and its value in trade dollars is transferred to the creditor, who can spend it in the network. A company also can use barter to pay a debt by offering to transfer credit it has earned to a creditor.
- High Travel & Entertainment (T&E) costs. Restaurants, hotels, stadiums and even some airlines barter because they have excess capacity in the form of empty seats and rooms that can be traded for products and services for which they would normally pay cash. However, T&E taxes and gratuities must be paid in cash. Conversely, barter exchange network clients with high T&E expenses can benefit because of the number of travel and hospitality choices available. This includes companies that offer travel incentives to high performers. Non-monetary transactions IFRS 15
- Products and services needed by hospitality firms. Companies that sell or repair furniture, plumbing, air-conditioning and heating systems, and those that offer cleaning, painting and other services needed by restaurants and hotels, find their products and services are in high demand in the network. Non-monetary transactions IFRS 15
- Excess inventory or capacity. A company with excess inventory should consider barter before liquidation because barter offers the opportunity to sell at full price. A plumbing wholesaler with 500 faucets might earn trade dollars from a Caribbean resort that would happily take such an item in quantity in exchange for vacant rooms that still another client in the network might use for a company retreat. Companies with excess capacity are barter candidates because capacity can be turned into extra business, business that costs the company only the direct costs of producing their goods and services.
- Seasonal fluctuations. For some companies, barter may not be beneficial at certain times of the year. A furrier, for example, may be too busy in the fall and winter seasons, but during the slow spring and summer, when inventory still on hand is moving slowly and cash flow is light, barter business probably would be welcomed. Non-monetary transactions IFRS 15
- A new product or service. Barter can be used in several ways to lower the risk of introducing a new product or service in test marketing, for example because it costs nothing in promotional expense other than barter exchange fees. In addition, the direct cost of promoting a new product can be offset by trading the product or service for advertising through the network.
Non-monetary transactions IFRS 15
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