Treatment for exchange of goods in IFRS

Yasaswi Gomes new (Finance ) (4469 Points)

22 February 2024  

XYZ manufactures fridge and each fridge is 200$ in inventory plus 11% markup on it. ABC manufactres televisions and each television is worth 250$ in inentory plus 10% markup on it. Both the companies exchanged 1 fridge for 1 tv. What is the accounting treatment for it in IFRS please and how is the loss in this transaction treated?

 

Certainly! Let’s explore the accounting treatment for the exchange of a fridge and a television between XYZ and ABC companies, considering the International Financial Reporting Standards (IFRS).

  1. Initial Recognition:

    • The fridge and television are classified as property, plant, and equipment (PPE).
    • XYZ recognizes the fridge at its initial cost, which is $200 plus an 11% markup (i.e., $22). Therefore, the total initial cost of the fridge is $222.
    • ABC recognizes the television at its initial cost, which is $250 plus a 10% markup (i.e., $25). Thus, the total initial cost of the television is $275.
  2. Measurement After Recognition:

    • Both companies can choose between two models for subsequent measurement:
      • Cost Model: The fridge and television are carried at their historical cost less accumulated depreciation and impairment losses.
      • Revaluation Model: The fridge and television are revalued to fair value, with any resulting surplus or deficit recognized in other comprehensive income.
    • Depreciation is then calculated based on the chosen model.
  3. Exchange Transaction:

    • Since XYZ and ABC exchanged 1 fridge for 1 television, no monetary consideration is involved.
    • The exchange is considered a non-monetary transaction.
    • The accounting treatment depends on whether the exchange has commercial substance:
      • If the exchange has commercial substance (i.e., the future cash flows of the combined asset differ from the individual assets), the companies adjust the carrying amounts of the fridge and television to their fair values.
      • If the exchange lacks commercial substance, the companies retain the carrying amounts of the original assets.
  4. Journal Entries:

    • Assuming the exchange has commercial substance:
      • XYZ:
        • Debit: Television (PPE) - Fair Value
        • Credit: Fridge (PPE) - Carrying Amount
      • ABC:
        • Debit: Fridge (PPE) - Fair Value
        • Credit: Television (PPE) - Carrying Amount
  5. Treatment of Loss:

    • If the fair value of the television received by XYZ is less than the carrying amount of the fridge given up, a loss is recognized.
    • The loss is recorded in the income statement as an expense.
    • The loss reduces the carrying amount of the fridge and is reflected in the financial statements.

Remember that this is a simplified explanation, and actual accounting treatment may involve additional considerations