 Hello and welcome to this session. This is Professor Farhad in which we would look at CPA exam questions that cover the non-monetary exchange, an important topic that's covered on the CPA FAR exam section, as well as an intermediate accounting. This is a major topic. In other words, if you are lacking knowledge, or if you are lacking competency in this topic, there's a good chance you may not get the 75 points that's needed on the CPA exam. How can I help you? In contrast to a review course, in my intermediate accounting course, I covered this concept in details. So what should you do? You should go to my intermediate accounting and learn the concept in details. So when you take a review course, it's much easier to follow with them. As always, I would like to remind you to connect with me on LinkedIn. If you haven't done so, YouTube is where you would need to subscribe. I have 1,700 plus accounting, auditing, tax, finance, as well as Excel tutorial. If you like my lectures, please like them, share them, put them in playlists. If they benefit you, it means they might benefit other people, connect with me on Instagram. On my website, farhadlectures.com, you will find additional resources, and this is where you find the additional explanation about the non-monetary exchange. Just to give you an example, in a typical CPA course, they might spend 30 minutes on this topic. I might spend three hours. That's the difference between my course, which I teach you the material in a CPA review course. The CPA review course assumed you already spend those three hours. There's a good chance you might have spent three hours when you were in college, but you already forgot about them. That's why my course will help you tremendously. I also have plenty of resources, multiple choice, true, false, exercises to help you pass the CPA exam. Let's take a look at the first question. Under US GAAP, losses in connection with the non-monetary exchange are the third one. The exchange is said to lack commercial substance, have commercial substance. Here we have to know that we're looking at a few different things. Let's take a look at what we're looking at first. It's US GAAP. We are dealing with losses and non-monetary exchange. Non-monetary exchange, it means you're exchanging two fixed assets, generally speaking, with no cash involved or minimal cash involved. That's what non-monetary exchange is. The third means it's pushed down the road. It's not accounted for now. When do we push the losses in the non-monetary exchange? Is it when we have a commercial substance or don't have a commercial substance both either or? Also, we need to know what is a commercial substance. Commercial substance is, we said when a business transaction is said to have a commercial substance, when it's expected that the future cash flow would change as the result of this transaction. When you have an exchange, and as a result of this exchange between the two parties, the future cash flow, the future cash flow changes, goes up, usually goes up or go down. It does actually change the level of valuation for your company. It changed the productivity level because it's changing your future cash flow. If you exchange two assets and your cash flow is the same before and after, so is this really an exchange? It's basically the same replacement. What happened is your cash flow and the risk of receiving that cash flow will fluctuate. This is when we said we have a commercial substance. The question is, what do we do with losses? Guess what? You have to know this. In accounting, we are conservative. If you have losses for GAP, I have to be very careful because we have GAP and we have IRS. We have GAP. Here, since FAR cover GAP, regulation cover IFRS. We're not talking about regulation. We're not talking about the IRS. For FAR, as accountant, we are conservative. Every time we have losses, we don't defer the losses. Whether the transaction has a commercial substance or lack of a commercial substance, it doesn't matter. The answer is, neither. We don't defer losses. No defer of losses. Just know this. When we have losses, what does that mean? It's we don't defer them. It means we recognize them. Recognize them means we record them. We record them in the journal entry. We don't defer them. So losses are not deferred. That's the first thing you need to know about this. Let's take a look at this question where we are involving some computation. Temple corporation exchange in equipment with an appraised value. When say appraised value, it means the fair market value or market value of this asset of 60,000 original cost of 52 and received from Chester Corp. Equipment with a fair value of 64. Under US GAP, how much is the gain on the exchange for Temple Corp. Assuming the transaction has commercial substance. So what they're telling us here is the commercial the transaction has a commercial substance and how much do we calculate of the game? So how much simply put how much is the gain? What is commercial substance? Commercial substance means the future cash flow from this transaction will change and the riskiness of that future cash flow will change. So you're in a new position. Well, first, do we know how to compute a gain? How do you compute a gain? You compute a gain by taking your, so for example, if you sell something to an outside party, what do you do is you take your proceeds minus the book value. This is what you do. So the proceeds usually represent the fair market values. Here the proceeds, you're not selling it, you're exchanging it, but if you sell it, you can get $60,000. Now they are telling you the original cost is 52. They're not telling you it has any accumulated depreciation. So if the original cost of 52 with no accumulated depreciation, it means the book value is 52. So minus 52,000, you have a gain of 8,000. That's not enough. The question is how much of the gain, how much is the gain? The gain is 8,000. Therefore, the answer is B, how much is the gain? The gain is 8,000. And since it has commercial substance, we are going to recognize the gain. So the gain is also recognizable. So we have to be very careful that the gain is recognizable because it has commercial substance. And this is, those are the rules that I cover in my course on farhatlectures.com. I cover specific details with many examples. So notice we don't care about the fair value of the other asset to compute our gain. Just we look at, if we sold it, we'll get 60, our cost is 52. Here the cost is also the book value because we are not given accumulated depreciation. So they keep it simple. Under US GAAP, non-monetary exchanges that lack commercial substance could possibly result in which of the following not being recognized immediately. So now what we're saying is you have a monetary, you have an exchange, and that exchange lack commercial substance could possibly result in which of the following not being recognized immediately. Well, guess what? I already told you losses are always recognized. I just, two questions ago, the first question we said losses are always recognized. So simply put, losses are always recognized. So one is not an answer. So every place when there is one, we can't take it out. All what we have to know now is two would not be recognized or would it be recognized? Well, good. Let's look. It lacks commercial substance. When the transaction lacks commercial substance, and if you have a gain, you not recognize. You don't recognize the gain. Therefore, B is the answer. Hold on a second. Didn't you just said here that I have 8,000 gain and I recognize it? Yes. The reason I recognize the gain I recognize, let me just write. Why did I recognize the gain here? Because, let me highlight in yellow, because the question state clearly state I had commercial substance. Here the question says you lack commercial substance. So for the gain, if it lacks commercial substance, so for the gain, sometimes it's recognizable, sometimes it's recognizable, sometimes it's the third. When is it the third? When it lack commercial substance, which is in this situation. Now again, there's more rules because sometimes you might involve cash in the transaction. So this is just a general idea how to answer these questions. But if you really want more, go to farhatlectures.com. I know I keep saying this because that's the only way I can help you. There's no way I can help you other than that. Let's take a look at this question. South corporation exchange equipment with a cost of 480 with a fair value of 380 for a warehouse owned by Jordan Corp. Future cash flow will significantly change as a result of this transaction. What they're telling you in this statement is this transaction has commercial substance. They did not say it has commercial substance. They told you it will significantly change. Guess what? The future cash flow will change. It has a commercial substance. What does that mean? It means if you have a gain, you recognize it and you always recognize the loss. On the date of the exchange, the equipment has accumulated depreciation of 80,000 and south has to pay $5,000 in cash. So we have two questions about this and they can ask many questions about non-monetary exchange. So you have to know what you are being asked and answer that right question. How much gain or loss should be reported by south? Well south has a cost of 480. That's the cost of the asset. The asset has accumulated depreciation of 80,000. You have to be very careful because they give you accumulated depreciation later. So cost minus accumulated depreciation of 80,000. It's going to give us a book value of 400,000. That's the first thing we know that we have a book value of 400,000. The fair value of this asset is 380. So if you want to sell it, you're going to get 380. It has a book value of 400,000. Guess what? You are at a loss of 20,000. And is this loss recognized? Yes, losses are always recognized. So the answer is we have a loss. That's it. And the loss is recognized. So that's easy, peasy answer. Be careful. It's not a gain because this is the proceeds. The proceeds are the 380. If you sell it, you can get the fair value. Now the cash that you pay has nothing to do with your asset gain or loss. The asset gain or loss is the asset fair market value versus its book value. Sometimes the book value is giving. Sometimes you have to compute the book value by taking cost minus accumulated depreciation. That's fine. After the exchange, how much is the basis of the warehouse to Southcourt? Now this is this is totally a different question. The question is what is the, because we gave up the equipment and we received a warehouse. This is the deal. Now the question is how much do we recognize the warehouse when we recognize, how much do we recognize the warehouse? Well, we recognize the new asset based on the fair market value of the asset given up. This is, this is, this is an important statement. It's going to be based on the fair value assets given up. And this is an important statement. So it's based on the fair value of the assets given up. What did we give up? Oops, sorry. Let's go back here. Let's keep this. What did we give up? We give up two things. We gave up South Corporation gave up two things. One, they gave up equipment that's worth fair market value of $380,000 and they gave up cash of $5,000. How much is the $5,000 worth? $5,000. Cash is $5,000. So in total, we gave up $385,000. Therefore the warehouse should be reported based on the asset giving up. We gave up $385,000 in asset. This is the net give up asset. This is what we gave up. Therefore the new asset will be recorded based on that amount, $385,000. Okay. So again, I don't want to, actually I'm going to repeat myself. If you want more, more about this topic, go to my website, go to intermediate accounting. I have plenty. I have maybe two to three, three hours easily of this topic, detailed explanation, practice exercises, true, false, actual exercises. If you're studying for your CPA, do not shortchange yourself. This is a lifetime investment that's going to pay dividend over 20, 30 years. Study hard, use all your resources and one subscription on my website gives you access to everything to almost 25 different modules in accounting, finance and taxation. Good luck. Study hard and most importantly, stay safe during those coronavirus days.