ASC 845 governs how a company accounts for nonmonetary transactions under U.S. GAAP: exchanges of assets or services for other assets or services where little or no cash changes hands. The default is to record the asset received at the fair value of the asset given up and recognize any gain or loss immediately. Three exceptions flip that treatment to the book value of the surrendered asset: the exchange lacks commercial substance, fair value cannot be reasonably determined, or two entities in the same line of business are swapping inventory to serve customers.
What Counts as a Nonmonetary Transaction
A nonmonetary transaction is any exchange in which the consideration flowing between the parties is primarily noncash: trading an old machine for a newer one, swapping a parcel of land for a long-term lease interest, exchanging product between distributors to fill regional demand. Because there is no cash purchase price to anchor the accounting, these exchanges need their own measurement framework.
Several transaction types that look nonmonetary are handled under other parts of the Codification and sit outside ASC 845:
- Business combinations, which fall under ASC 805.
- Transfers to owners and transfers between entities under common control.
- Exchanges where a company issues its own equity instruments for nonmonetary assets.
- Involuntary conversions, such as an insurance recovery on a destroyed asset.
Same-line-of-business inventory swaps stay inside ASC 845 but get special treatment, discussed below. ASC 606 explicitly excludes those transactions from revenue recognition, which is why ASC 845 governs them.
The Default Rule: Fair Value
Start by recording the asset received at the fair value of the asset given up. If the fair value of what you receive is more clearly evident, use that figure instead. The difference between the fair value of the surrendered asset and its carrying amount is a gain or loss on the income statement.
Fair value here follows the ASC 820 framework used throughout GAAP, with its measurement hierarchy favoring observable market data over unobservable estimates.1Deloitte Accounting Research Tool. ASC 820-10 Fair Value Hierarchy When both parties’ assets have observable market prices, the mechanics are straightforward. The work gets harder when one or both assets lack comparables and the entity has to reach for discounted cash flow models or appraisals.
Three Exceptions That Force Book Value Accounting
ASC 845 identifies three situations where fair value does not apply and the acquired asset is recorded at the book value of the asset surrendered.
The Exchange Lacks Commercial Substance
If the exchange does not meaningfully change the entity’s economic position, the acquired asset takes on the surrendered asset’s book value and no gain is recognized.2Deloitte Accounting Research Tool. Nonmonetary Exchange – Deloitte Roadmap on Disposals of Long-Lived Assets This is the most frequently encountered exception, and the analysis behind it is detailed in the next section.
Fair Value Is Not Reasonably Determinable
If neither the surrendered asset nor the received asset has a fair value that can be reasonably determined, the entity records the new asset at the old asset’s book value. This typically arises with highly specialized or one-of-a-kind assets where no comparable market data exists and cash flow projections are too speculative to produce a reliable estimate.
Same-Line-of-Business Inventory Swaps
When two entities in the same line of business exchange inventory to facilitate sales to customers, the exchange is recorded at the carrying amount of the inventory given up. The rule prevents companies from using routine product swaps to manufacture gains. ASC 606 excludes these transactions from revenue recognition, leaving ASC 845 to govern them.3Deloitte Accounting Research Tool. ASC 606-10 Scope
Determining Commercial Substance
Whether an exchange has commercial substance is the central judgment call in ASC 845 accounting, because it decides both whether you recognize a gain and whether you measure the new asset at fair value or book value.
An exchange has commercial substance if the entity’s future cash flows are expected to change significantly as a result. The standard provides two alternative tests, and meeting either one is enough:4PwC Viewpoint. Initial Measurement – Asset Acquisitions
- The cash flow configuration test. The risk, timing, or amount of future cash flows from the asset received differs significantly from those of the asset surrendered. A significant change in any one of the three elements is enough.
- The entity-specific value test. The entity-specific value of the received asset differs significantly from the entity-specific value of the surrendered asset, relative to the fair values involved. Entity-specific value captures what the asset is worth to this particular company given its own planned use, rather than what a generic market participant would pay.
Swapping one delivery truck for an identical model of the same age and condition fails both tests: the company’s cash flows from operating the truck look essentially the same before and after. Trading a warehouse for a fleet of specialized vehicles almost certainly passes the cash flow configuration test, because the risk profile, timing of returns, and revenue patterns all shift.
Recognizing Gains and Losses
Once commercial substance is settled, the gain and loss rules follow directly.
Exchange With Commercial Substance
Both gains and losses are recognized in full, immediately. The asset received goes on the books at fair value, and the difference between that fair value and the surrendered asset’s carrying amount flows through the income statement. The exchange is treated as the culmination of the earnings process for the old asset, much like an outright sale.
Exchange Lacking Commercial Substance
Losses are still recognized immediately. GAAP’s conservatism principle will not let you bury a loss by rolling it into the new asset’s basis.2Deloitte Accounting Research Tool. Nonmonetary Exchange – Deloitte Roadmap on Disposals of Long-Lived Assets
Gains are deferred. You record the new asset at the old asset’s book value, which effectively buries the unrealized gain in the new asset’s basis. The gain stays deferred until a future event triggers recognition, such as selling the new asset for cash.
How Boot Changes the Calculation
Cash or other monetary consideration included in an otherwise nonmonetary exchange is called boot. Boot introduces a partial monetary element that affects gain recognition when the exchange lacks commercial substance.
Receiving Boot
If you receive boot in an exchange that lacks commercial substance, you recognize a proportional share of the total gain:
Recognized gain = Total gain × (Boot received ÷ Total consideration received)
Total consideration received equals the fair value of the nonmonetary asset received plus the boot. Receive $10,000 cash alongside an asset worth $40,000, and the boot is 20% of total consideration ($10,000 ÷ $50,000), so you recognize 20% of the total gain.5Deloitte Accounting Research Tool. ASC 606-10 Scope – Section: ASC 845-10-25-6
The 25% Threshold
When boot reaches 25% or more of the total fair value of the exchange, ASC 845 treats the entire transaction as monetary. The full gain is recognized and both the payer and receiver account for the transaction at fair value. Once a quarter of the deal is cash, the economics look more like a sale with a trade-in than a swap.5Deloitte Accounting Research Tool. ASC 606-10 Scope – Section: ASC 845-10-25-6
Paying Boot
If you pay boot, you recognize no gain, regardless of amount. The cash paid is treated as additional investment in the new asset. Your basis in the new asset equals the carrying amount of the surrendered asset plus the cash paid.
Assumed Debt Counts as Boot
When the counterparty assumes a liability you owe, such as a mortgage on property you are exchanging, that debt relief is generally treated as boot received. No cash actually changes hands, but the economic effect matches receiving cash and paying off the loan yourself. Factor assumed liabilities into the boot calculation when checking whether the 25% threshold has been crossed.
Impairment Before the Exchange
Deciding to enter a nonmonetary exchange does not, by itself, mean the asset being surrendered is impaired. There is no automatic requirement to run an ASC 360 impairment test solely because you plan to swap an asset.2Deloitte Accounting Research Tool. Nonmonetary Exchange – Deloitte Roadmap on Disposals of Long-Lived Assets
Still, the circumstances surrounding the exchange may themselves be impairment indicators. If the exchange terms imply the asset’s fair value has dropped below its carrying amount, or if the asset has been sitting idle, those facts can independently trigger a recoverability test. When an exchange that lacks commercial substance is recorded at book value, that book value must first be reduced for any indicated impairment. Skip that step and the new asset’s basis is overstated from day one.
Worked Example
Suppose your company owns a specialized printing press with an original cost of $200,000 and accumulated depreciation of $120,000, giving a carrying amount of $80,000. You exchange it, plus $15,000 in cash, for a digital printing system with a fair value of $130,000. An appraiser determines the old press has a fair value of $115,000.
The two assets produce fundamentally different cash flow profiles: different technology, different output capacity, different maintenance costs. The exchange has commercial substance. You record the new digital system at its fair value of $130,000. The gain on the old press is $35,000 (fair value of $115,000 minus carrying amount of $80,000), recognized immediately. The $15,000 cash paid is part of the total cost of the new asset: $115,000 fair value of the old press plus $15,000 cash equals the $130,000 cost of the new system.
Now change the facts. You swap the old press for an almost identical press of similar age and capability, with no cash involved. The cash flow configuration barely changes, and the entity-specific value is roughly the same. The exchange lacks commercial substance. You record the new press at the old press’s carrying amount of $80,000 and recognize no gain.
Book vs. Tax: ASC 845 and IRC Section 1031
ASC 845 governs financial reporting. The tax treatment of the same transaction can look completely different. Under IRC Section 1031, a company can defer gain recognition on a like-kind exchange of real property held for business use or investment.6Office of the Law Revision Counsel. 26 USC 1031 Exchange of Real Property Held for Productive Use or Investment Since the Tax Cuts and Jobs Act took effect in 2018, Section 1031 applies only to real property. Exchanges of equipment, vehicles, artwork, and other personal property no longer qualify for tax deferral.7Internal Revenue Service. Like-Kind Exchanges Real Estate Tax Tips
That creates a common book-tax divergence. A real property exchange with commercial substance under ASC 845 forces book gain recognition, but it may still qualify for full tax deferral under Section 1031 if the like-kind and holding-period requirements are met. When the mismatch occurs, account for the deferred tax effects under ASC 740.
Real property held primarily for sale, such as a developer’s inventory of lots, is excluded from Section 1031 even though the property is real estate. Section 1031 also imposes strict timing rules (45 days to identify replacement property, 180 days to close) that have no parallel in ASC 845. Book accounting follows the exchange date; tax deferral depends on hitting those deadlines.
Disclosure Requirements
ASC 845’s disclosures are narrow compared to some other standards. The specific requirement to watch is for inventory exchanges: an entity must disclose the amount of revenue and costs, or gains and losses, associated with inventory exchanges recognized at fair value.8Deloitte Accounting Research Tool. ASC 845 Nonmonetary Transactions Beyond that, the general disclosure principles in ASC 820 apply whenever fair value measurement is involved, so you may need to disclose the valuation techniques and inputs used for Level 2 and Level 3 measurements. For material nonmonetary exchanges, most preparers also describe the transaction in the notes so readers understand its nature and business purpose.