## PPE Acquired by Exchange of Assets
When an entity acquires a new asset by giving up an existing asset (exchange/swap), the cost of the incoming asset is determined based on whether the transaction has commercial substance.
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## Step 1: Does the Transaction Have Commercial Substance?
A transaction has commercial substance if the cash flows of the entity are expected to change as a result of the exchange (i.e., the economic reality changes).
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## Step 2: Apply the Preference Order
### If Transaction Has Commercial Substance → Record at FAIR VALUE
Use the following preference order:
| Preference | Basis | Use When |
|---|---|---|
| 1st | Fair Value of Asset Given Up (outgoing) | Available |
| 2nd | Fair Value of Asset Acquired (incoming) | FV of given-up not available |
| 3rd | Carrying Amount of Asset Given Up | Neither FV is available |
> The outgoing asset is always de-recognised at its carrying amount (book value).
> Any difference between the recorded value of the incoming asset and the carrying amount of the outgoing asset is recognised as Profit or Loss on Exchange in P&L.
### If Transaction Has NO Commercial Substance
Record the incoming asset at the carrying amount of the asset given up. No profit or loss is recognised.
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## Journal Entry Structure
```
Incoming Asset A/c Dr [Value as per preference above]
To Outgoing Asset A/c [Carrying Amount of outgoing asset]
To Profit on Exchange (P&L) [Balancing figure — if gain]
```
If a loss arises:
```
Incoming Asset A/c Dr [Value]
Loss on Exchange (P&L) Dr [Balancing figure]
To Outgoing Asset A/c [Carrying Amount]
```