1. Exchanges of Nonmonetary Assets
Acct 592
4/16/2017
Exchanges of Nonmonetary Assets
SFAS No. 153 – Exchanges of Nonmonetary Assets
APB Opinion No. 29 generally required that exchanges of nonmonetary assets would be based on the fair values of the assets exchanged
Exception for exchanges of similar productive assets.
This standard changes the exception to a “lack of commercial substance” rule
Prepared by Teresa Gordon

2. Exchanges of nonmonetary assets
Acct 592
4/16/2017
Exchanges of nonmonetary assets
Formerly had special rules for exchanges of “similar assets”
Losses were recognized
Gains were not recognized or only partially recognized (if boot {cash} was received)
Those rules are now GONE
Probably a good thing since the new rules are actually less complicated!
Prepared by Teresa Gordon

3. From Kieso Update2 for 11th ed.
Acct 592
4/16/2017
From Kieso Update2 for 11th ed.
Prepared by Teresa Gordon

4. SFAS No. 153 –Exchanges of Nonmonetary Assets
Acct 592
4/16/2017
SFAS No. 153 –Exchanges of Nonmonetary Assets
Nonmonetary exchanges are recognized at the fair value of the nonmonetary asset relinquished (unless fair value of asset received is more clearly evident)
EXCEPTIONS
1. Fair value is not determinable for either asset
2. Exchange facilitates sales to customers.
The transaction is an exchange of a product or property held for sale in the ordinary course of business for a product or property to be sold in the same line of business to facilitate sales to customers other than the parties to the exchange.
3. The exchange lacks commercial substance.
If fair value of neither asset can be ascertained, we use book value of asset relinquished plus any cash paid as the book value of the new assets.
Prepared by Teresa Gordon

5. Acct 592
4/16/2017
Commercial Substance
A nonmonetary exchange has commercial substance if the entity’s future cash flows are expected to significantly change as a result of the exchange.
A significant change in future cash flows is defined to be meeting one or both of the following two conditions:
Configuration of cash flows is different
The entity-specific value is different
Commercial Substance
A nonmonetary exchange has commercial substance if the entity’s future cash flows are expected to significantly change as a result of the exchange.
A significant change in future cash flows is defined to be meeting one or both of the following two conditions:
Configuration of cash flows is different
The configuration (risk, timing, and amount) of the future cash flows of the asset received differs significantly from the configuration of the future cash flows of the asset transferred.
The entity-specific value is different
The entity-specific value of the asset received differs from the entity specific value of the asset transferred, and the difference is significant in relation to the fair values of the assets exchanged.
Prepared by Teresa Gordon

6. Examples (from KWW update)
Acct 592
4/16/2017
Examples (from KWW update)
Two car rental companies swap Fords for Chevys [equivalent models] to increase variety of cars available
Lacks commercial substance because the cash flows generated by rental activities will be substantially the same
Prepared by Teresa Gordon

7. Car Rental Company Example
Acct 592
4/16/2017
Car Rental Company Example
The (loss)/gain will be recognized as the vehicles are used since depreciation expense will be higher (lower)
Here is the JE that the company receiving the Chevy’s will make:
Prepared by Teresa Gordon

8. Car Rental Company Example
Acct 592
4/16/2017
Car Rental Company Example
Make the journal entry on the books of the company that receives the Fords (assume cost is $200,000 and accumulated depreciation is $40,000):
Ford automobiles 150,000 Chevy automobiles 200,000 Acc’d Depreciation 40, Cash ,000
Prepared by Teresa Gordon

9. Changes in Principles, Estimates, Entities & Corrections of Errors
Acct 592
4/16/2017
Changes in Principles, Estimates, Entities & Corrections of Errors
SFAS No Accounting Changes and Error Corrections
Prepared by Teresa Gordon

10. Accounting Changes & Corrections
Acct 592
4/16/2017
Accounting Changes & Corrections
SFAS No. 154 discusses 3 types of accounting changes plus correction of errors
Changes in Accounting Principle
Changes in Accounting Estimates
Changes in Reporting Entity
Errors in Financial Statements
What’s different:
APB Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle.
This Statement requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change.
When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, this Statement requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable.
This Statement requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle, such as a change in nondiscretionary profit-sharing payments resulting from an accounting change, should be recognized in the period of the accounting change.
This Statement also requires that a change in depreciation, amortization, or depletion method for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle.
This Statement carries forward without change the guidance contained in Opinion 20 for reporting the correction of an error in previously issued financial statements and a change in accounting estimate. This Statement also carries forward the guidance in Opinion 20 requiring justification of a change in accounting principle on the basis of preferability.
Prepared by Teresa Gordon

11. SFAS No. 154 - Accounting Changes and Error Corrections
Acct 592
4/16/2017
SFAS No Accounting Changes and Error Corrections
Issued May 2005 – effective for fiscal years beginning after 12/15/2005
Applies to VOLUNTARY changes in choice of accounting principle
No more cumulative effect of change in accounting standards at bottom of income statement
All changes in accounting principles would be handled through retroactive restatement of prior years
Change previously reported numbers so that they now represent what the numbers would have been had the new principle been in use during that time period
Replaces APB Opinion No. 20 and SFAS No. 3
Prepared by Teresa Gordon

12. Some changes in principle = a change in estimate
Acct 592
4/16/2017
Some changes in principle = a change in estimate
A change in depreciation method is now considered a change in estimate and would not require retroactive restatement of prior years
We already had the rule that if a change in principle cannot be distinguished from a change in estimate, it would be treated as a change in estimate
Example: Switch bad debt accounting from percentage of sales method to aging of accounts receivable (allowance) method
FAS154, para. 20. Distinguishing between a change in an accounting principle and a change in an accounting estimate is sometimes difficult. In some cases, a change in accounting estimate is effected by a change in accounting principle. One example of this type of change is a change in method of depreciation, amortization, or depletion for long-lived, nonfinancial assets (hereinafter referred to as depreciation method). The new depreciation method is adopted in partial or complete recognition of a change in the estimated future benefits inherent in the asset, the pattern of consumption of those benefits, or the information available to the entity about those benefits. The effect of the change in accounting principle, or the method of applying it, may be inseparable from the effect of the change in accounting estimate. Changes of that type often are related to the continuing process of obtaining additional information and revising estimates and, therefore, are considered changes in estimates for purposes of applying this Statement.
Prepared by Teresa Gordon

13. Restatement Example SFAS No. 154, Appendix A
Acct 592
4/16/2017
Restatement Example
SFAS No. 154, Appendix A
Illustration 1 - detailed example of a change from LIFO to FIFO inventory method
Shows extensive disclosures that would be needed to communicate impact on balance sheet, income statement, and statement of cash flows
Prepared by Teresa Gordon

14. Acct 592
4/16/2017
A simplification?
Now all types of accounting changes are handled the same way – retroactive restatement
Only exception is when it is not practicable to determine impact on prior periods
Prepared by Teresa Gordon

15. Asset Retirement Obligations
Acct 592
4/16/2017
Asset Retirement Obligations
FIN 47 - Accounting for Conditional Asset Retirement Obligations: an interpretation of FASB Statement No. 143
Prepared by Teresa Gordon

16. Acct 592
4/16/2017
Do we need to review FAS 143?
There are lecture notes on the “notes” page at the course web site
I’m not sure if there will be time to fit this topic in this semester but some of you have done a research case on AROs (in Acct 414 or 315)
If you know nothing about this topic and want to do something for extra credit, ask about this case
Prepared by Teresa Gordon

17. Asset retirement obligations
Acct 592
4/16/2017
Asset retirement obligations
FIN 47 (March 2005) would clarifies that a legal obligation to perform an asset retirement activity that is conditional on a future event is within the scope of FASB Statement No. 143
Uncertainty surrounding the timing and method of settlement that may be conditional on events occurring in the future would be factored into the measurement of the liability rather than the recognition of the liability.
If there is insufficient information to estimate the fair value, the liability would be initially recognized in the period in which sufficient information is available for an entity to make a reasonable estimate of the liability’s fair value.
Prepared by Teresa Gordon

18. Acct 592
4/16/2017
ARO Examples
Telephone company uses wood poles that are chemically treated
No legal requirement to remove poles from ground
However, if and when poles are removed from the ground, special disposal procedures are mandated by law
An asset retirement obligation should be estimated at date of purchase
Example 1
A2. A telecommunications entity owns and operates a communication network that utilizes
wood poles that are treated with certain chemicals. There is no legal requirement to remove
the poles from the ground. However, the owner may replace the poles periodically for a
number of operational reasons. Once the poles are removed from the ground, they may be
disposed of, sold, or reused as part of other activities. There is existing legislation that
requires special disposal procedures for the poles in the particular state in which the entity
operates.
A3. At the date of purchase of the treated poles, the entity has the information to estimate
a range of potential settlement dates, the potential methods of settlement, and the
probabilities associated with the potential settlement dates and methods based on established
industry practice. Therefore, at the date of purchase, the entity is able to estimate the
fair value of the liability for the required disposal procedures using an expected present
value technique.
Prepared by Teresa Gordon

19. ARO Example Facility currently owned contains asbestos
Acct 592
4/16/2017
ARO Example
Facility currently owned contains asbestos
Since acquisition, regulations are put into place that require special handling if building is renovated or demolished
ARO should be recognized when regulations go into effect, if entity can reasonably estimate fair value of the liability
A10. Although the timing of the performance of the asset retirement activity is conditional
on the factory undergoing major renovations or being demolished, existing regulations
create a duty or responsibility for the entity to remove and dispose of asbestos in a special
manner, and the obligating event occurs when the regulations are put in place. Therefore, an
asset retirement obligation should be recognized when regulations are put in place if the
entity can reasonably estimate the fair value of the liability. In this example, the entity believes that there is an indeterminate settlement date for the asset retirement obligation
because the range of time over which the entity may settle the obligation is unknown or
cannot be estimated. Therefore, the entity cannot reasonably estimate the fair value of the
liability. Accordingly, the entity would not recognize a liability for the asset retirement
obligation when regulations are put in place, but it should disclose (a) a description of the
obligation, (b) the fact that a liability has not been recognized because the fair value cannot
be reasonably estimated, and (c) the reasons why fair value cannot be reasonably estimated.
The company would recognize a liability in the period in which sufficient information is
available to reasonably estimate its fair value
Prepared by Teresa Gordon