Page 452 - Accounting Principles (A Business Perspective)

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Internet use by their employees is that they might visit interesting nonbusiness related sites on
company time.

Sometimes accidents, fires, floods, and storms wreck or destroy plant assets, causing companies to incur losses.
For example, assume that fire completely destroyed an uninsured building costing USD 40,000 with up-to-date
accumulated depreciation of USD 12,000. The journal entry is:
Fire Loss (-SE) 28,000
Accumulated Depreciation—Buildings (+A) 12,000
Buildings (-A) 40,000
To record fire loss.

If the building was insured, the company would debit only the amount of the fire loss exceeding the amount to
be recovered from the insurance company to the Fire Loss account. To illustrate, assume the company partially
insured the building and will recover USD 22,000 from the insurance company. The journal entry is:
Receivable from Insurance Company (+A) 22,000
Fire Loss (-SE) 6,000
Accumulated Depreciation—Buildings (+A) 12,000
Buildings (-A) 40,000
To record fire loss and amount recoverable from
insurance company.

Exchanges of nonmonetary assets Until late 2004, the rules according to APB Opinion No. 29 for
recording exchanges of nonmonetary assets depended on whether they were exchanges of dissimilar assets such as
a truck for a machine or were similar assets such as a truck for a truck . If the exchange classified as an exchange of
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dissimilar assets, the acquired asset would be recorded at its fair value and any gain or loss would be recognized. In
late 2004, the FASB issued a new standard, Statement of Financial Accounting Standards No. 153, "Exchanges of
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Nonoperating Assets: an amendment of APB Opinion No. 29" . This new standard was issued to bring about
greater agreement between US Generally Accepted Accounting Principles and International Financial Reporting
Standards and is effective for exchanges occurring during fiscal periods beginning after 2005 June 15.
This change allows the financial statements of US companies to be more comparable to the financial statements
of companies utilizing International Financial Reporting Standards.
The new FASB standard no longer distinguishes between dissimilar and similar asset exchanges. Instead it
differentiates between exchanges that have commercial substance and those that do not have commercial
substance. An exchange has commercial substance if, as a result of the exchange, future cash flows are expected
to change significantly. For instance, if a company exchanges a building for land (a dissimilar exchange), the timing
and the future cash flows are likely to be different than if the exchange had not occurred. Most exchanges qualify as

having commercial substance. However, if the exchange is not expected to create a significant change in future cash
flows, the exchange does not result in commercial substance. For example, if a company exchanges one truck for
another truck (a similar exchange) that will perform the same function as the old truck and for the same time
period so that the future cash flows are not significantly different, then the exchange does not result in commercial
32 APB, APB Opinion No. 29, "Accounting for Nonmonetary Transactions" (New York: AICPA, May 1973).
33 FASB, FASB Statement No. 153, "Exchanges of Nonmonetary Assets: an amendment of APB Opinion No. 29"

(Norwalk, CT: FASB Board, December 2004).

Accounting Principles: A Business Perspective 453 A Global Text