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

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

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

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

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

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

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

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 40,000 Cash 10,000 Prepared by Teresa Gordon

Changes in Principles, Estimates, Entities & Corrections of Errors Acct 592 4/16/2017 Changes in Principles, Estimates, Entities & Corrections of Errors SFAS No. 154 - Accounting Changes and Error Corrections Prepared by Teresa Gordon

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

SFAS No. 154 - Accounting Changes and Error Corrections Acct 592 4/16/2017 SFAS No. 154 - 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

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

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

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

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

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

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

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

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