## Exchange of Assets under AS 10
When a PPE is acquired by exchanging another asset (with or without cash), measurement of the incoming asset depends on whether the transaction has commercial substance.
---
### Step 1 — Determine Commercial Substance
| Situation | Commercial Substance? |
|---|
| Assets exchanged are of different nature / value / type | YES |
| Assets exchanged are of same nature / value / type | NO |
| Question gives no hint | Assume YES |
---
### Step 2A — Transaction HAS Commercial Substance
Measure incoming asset at (in priority order):
| Priority | Basis | When to use |
|---|
| 1st | FV of asset given up + any cash paid | FV of asset given up is available |
| 2nd | FV of asset acquired | FV of asset given up is NOT available |
Profit / Loss on exchange = Consideration − CA of asset given up → recognised in P&L.
Journal Entry (gain scenario):
```
Asset Acquired A/c Dr [1st or 2nd pref. amount]
To Asset Given Up A/c [Carrying Amount — always CA]
To Cash / Bank A/c [Cash paid, if any]
To Profit on Exchange (P&L) [Balancing figure]
```
---
### Step 2B — Transaction LACKS Commercial Substance
Incoming asset is recorded at CA of asset given up only.
No profit or loss is recognised — there is no profit motive in this exchange.
Journal Entry:
```
Asset Acquired A/c Dr [CA of asset given up]
To Asset Given Up A/c [Same CA amount]
```
---
### Golden Rule
> The asset given up is always credited at its Carrying Amount (CA) — regardless of commercial substance. Only the debit side and profit recognition differ.
### Example 1
Illustration 1 — Commercial Substance (iPhone ↔ Calculator + Cash)
Given:
- Asset acquired: iPhone 16 — FV ₹1,10,000
- Asset given up: Calculator — CA ₹60,000; FV ₹90,000
- Cash paid: ₹20,000
Step 1: Different assets → Commercial substance exists.
Step 2: 1st preference → FV of asset given up + cash = ₹90,000 + ₹20,000 = ₹1,10,000
| Account | Dr (₹) | Cr (₹) |
|---|
| iPhone 16 A/c Dr | 1,10,000 | |
| To Calculator A/c | | 60,000 |
| To Cash/Bank A/c | | 20,000 |
| To Profit on Exchange (P&L) | | 30,000 |
Profit = FV given up ₹90,000 − CA given up ₹60,000 = ₹30,000
### Example 2
Illustration 2 — No Commercial Substance (Ferrari Black ↔ Ferrari Pink)
Given:
- Asset acquired: Ferrari Pink — FV ₹1,50,000 (irrelevant — ignored)
- Asset given up: Ferrari Black — CA ₹1,00,000
Step 1: Same type of asset → No commercial substance (no profit motive).
Step 2: Record at CA of asset given up = ₹1,00,000
| Account | Dr (₹) | Cr (₹) |
|---|
| Ferrari Pink A/c Dr | 1,00,000 | |
| To Ferrari Black A/c | | 1,00,000 |
No profit or loss recognised. FV of ₹1,50,000 is completely ignored.
### Example 3
Illustration 3 — FV of Asset Given Up Not Available (Land ↔ Cash + Plant)
Given:
- Assets acquired: Cash ₹20,00,000 + Plant & Machinery FV ₹25,00,000
- Asset given up: Land — CA ₹10,00,000; FV not available
Step 1: Different assets → Commercial substance exists.
Step 2: 1st preference unavailable → use 2nd preference: FV of assets acquired
Total = ₹20,00,000 + ₹25,00,000 = ₹45,00,000
| Account | Dr (₹) | Cr (₹) |
|---|
| Cash A/c Dr | 20,00,000 | |
| Plant & Machinery A/c Dr | 25,00,000 | |
| To Land A/c | | 10,00,000 |
| To Profit on Exchange (P&L) | | 35,00,000 |