Treatment of exchange of asset under IAS 16

Question

The situation is:
- a fully depreciated asset will be traded in for a new one
- trade-in allowance of $250 provided by supplier
- original cost of the new asset is $3,750, after deducting the trade-in allowance ($250), amount needed to pay to supplier is $3,500

Please kindly give me some guidance regarding the treatment of the above exchange of asset under IAS 16.

Furthermore, In this case, there is a gain of $250.  How to record the gain? Credit the gain or deduct the gain directly from the cost of the new asset?

Answer 1

As per IAS 16.24 the cost of an asset received in exchange of an item of property, plant and equipment is measured at fair value unless (a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable.

In your case there seems to be a commercial substance and the fair value of the asset received is evident. Therefore you should record the asset received at $3750 and the gain is recorded separately as other income or so.

Entries would be as follows (assuming old asset's cost is 2500)

Acc. Dep.  - Old Asset    Dr 2,500
New Asset                        Dr 3,750
Old asset - cost                     Cr 2,500      
Cash                                       Cr 3,500
Gain                                        Cr    250

Comments

Thank you very much!

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new asset 3750-DR
acc dep 250 -DR
                        old asset 250 CR
                         cash 3500 CR
                         gain 250
in this case we need no assumption