Barter Transactions and Multiple-Year Retrospectively Rated Insurance Contracts by Nonreinsurance Enterprises

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Statement on Auditing Standards no. 69, The Meaning of "Present Fairly in Conformity With Generally Accepted Accounting Principles" in the Independent Auditor's Report, identifies Financial Accounting Standards Board emerging issues task force (EITF) consensuses as sources of established generally accepted accounting principles.

This month's column lists new EITF consensuses adopted March 24, 1994 (see the sidebar on page 102). In addition, two earlier consensuses on accounting for barter transactions involving barter credits and multiple-year retrospectively rated insurance contracts by insurance and other enterprises are summarized. The summaries are presented in the order of importance from broad to narrow applicability.

EITF Abstracts, copyrighted by the FASB, is available in soft-cover and loose-leaf versions and may be obtained by contacting the FASB order department at 401 Merritt 7, P.0. Box 5116, Norwalk, Connecticut 06856-5116. Phone: (203) 847-0700.

ISSUE NO. 93-11

EITF Issue no. 93-11, Accounting for Barter Transactions Involving Barter Credits, addresses a common accounting question affecting entities in many industries. Some transactions ("direct trades") swap one asset for another. Often, however, enterprises exchange goods or services (for example, inventory) for barter credits that allow one entity to receive goods or services in the future ("nondirect bartering"). Transactions involving barter credits often involve a third-party intermediary (for example, a barter company). Specific arrangements vary and can require cash payments in addition to barter credits or involve barter credits that expire after a stated period of time.

The issue is whether Accounting Principles Board Opinion no. 29, Accounting for Nonmonetary Transactions, applies to exchanges of nonmonetary assets for barter credits and, if so, the profit or loss amounts, if any, that should be recognized.

The EITF reached a consensus that Opinion no. 29 applied to such transactions. Paragraph 18 of Opinion no. 29 says: "...Accounting for nonmonetary transactions should be based on the fair values of the assets (or services) involved .... Thus, the cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is the fair value of the asset surrendered to obtain it, and a gain or loss should be recognized on the exchange. The fair value of the asset received should be used to measure the cost if it is more clearly evident than the fair value of the asset surrendered."

The consensus sets forth the presumption that the fair value of a nonmonetary asset given up is more clearly evident than the fair value of the barter credits received and therefore should be the basis for recording a transaction. The fair value of the asset surrendered should not be higher than its carrying value unless persuasive evidence exists to the contrary. In addition, the consensus requires any impairment in the carrying amount of the asset surrendered to be recognized prior to the exchange if the asset's fair value is less than its carrying amount. The impairment loss should be recognized in the income statement and a new cost basis should be established for the asset as a result of the writedown.

The consensus also provides guidance on how to determine the nonmonetary asset's fair value. The EITF suggested that paragraph 13 of FASB Statement no. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, might be useful in defining the nonmonetary asset's fair value and added that an estimate of the value of the barter credits to be received could not be used to determine fair value.

The EITF noted, however, that the presumption might be overcome (and the transaction recorded at the fair value of the asset received) if an entity could convert barter credits into cash in the near future (based on previous experience in doing so) or if independently quoted market prices existed for items to be received on the exchange of the barter credits. …


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