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If a company exchanges equipment for other equipment and it has a loss, it recognizes the...

If a company exchanges equipment for other equipment and it has a loss, it recognizes the loss immediately. What do you think is the main reason FASB’s guidance requires the immediate recognition of the loss?

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Answer #1

The main rational behind immediate recognition of loss is that, so the companies donot overstate the asset. Had the loss been allowed to defer, the balance sheet would show an unfair higher value in the asset side than it should actually be. Therefor irrespective of the commercial substance in exhange of non monetary assets, losses are recognized immediately.

For example assume that the book value of equipment is $12,000(After depreciation), fair value is $10,000 which is exchanged for a new equioment with fairvalue of $14,000. In this case new machine should be recognised at fair value of assset given up which is $10,000. The balance $2,000 should be immediately recognised as loss. So this will force the company not to state its asset above the assets fairvalue.

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