Facts: Melvin Corporation and Vivian Company made an agreement on January 1, Year 1, to unconditionally exchange assets. Melvin agreed to transfer a building that had a cost of $100,000 but an appraised value of $300,000 on January 1 of Year 2. Meanwhile, Vivian agreed to transfer a boat that initially cost $250,000.
As of December 31, Year 2, Melvin possesses the boat’s title but has not yet transferred the title to the building. The issues to be addressed are: 1) Does the incomplete transaction meet the requirements for a reciprocal nonmonetary exchange? 2) How should this transaction be recorded by each entity?
Conclusions: The transaction is not considered a reciprocal nonmonetary exchange because Melvin Corporation has not yet transferred title to the building. As the recipient of an asset in a nonreciprocal nonmonetary exchange, Melvin Corporation should record the boat at its estimated fair value when it is received. As the transferor of an asset in a nonmonetary transaction, Vivian Company should record a loss on the transfer of the disposed asset. Authorities on Costs to Exit a Lease Contract
This text provides a summary of the relevant ASC literature regarding nonmonetary exchanges. According to ASC 845-10-25-1, a reciprocal transfer of a nonmonetary asset is considered an exchange only if the transferor has no substantial continuing involvement in the transferred asset. ASC 845-10-20 defines a nonreciprocal transfer as a one-directional transfer of assets or services. ASC 845-10-30-1 states that, for a nonreciprocal transfer, the recipient should record the transferred asset at its fair value, while the transferor should recognize a gain or loss on the disposition of the asset.
Application of authorities: According to FASB requirements, the transaction between Melvin and Vivian does not qualify as a reciprocal exchange because Melvin still owes Vivian the transfer of the building. In year 2, Melvin should recognize the boat as a new asset and record its fair value. Vivian, on the other hand, should dispose of the boat and recognize a gain/loss based on its fair value at the time of transfer. If Melvin transfers title to the building after year 2, they will need to dispose of the asset and recognize the gain/loss, while Vivian will record the building at its fair value.
