What is an Asset Swap?

Asset swap refers to the exchange of non-monetary assets such as inventory, fixed assets, intangible assets, long-term equity investments and bond investments that are not intended to be held to maturity. The exchange does not involve or involves only a small amount of monetary assets (i.e., premiums). It is determined that the exchange involving a small amount of monetary assets is an asset swap, and the ratio of the premium to the entire asset swap amount is usually less than 25%.

How Does an Asset Swap Work?

Whether the prepayments belong to non-monetary assets is ambiguous in the academic world, but most of them tend to belong to non-monetary assets. The reasons for prepaid accounts to be non-monetary assets are as follows: Prepayments are the payment that the enterprise prepays to the raw material supplier. It will pass through the process of prepayment, raw materials, products, finished products, etc. The products are compensated, so the prepayments are the same as the inventory, which are the non-monetary assets of the company." The monetary assets paid account for the proportion of the fair value of the assets transferred (or the sum of the fair value of the assets exchanged and the monetary assets paid, and the two fair values are not included in the textbook), or the currency received. If the proportion of the assets to the fair value of the assets exchanged (or the sum of the fair value of the assets exchanged and the monetary assets received) is less than 25%, it shall be regarded as an asset swap, and the Guidelines shall apply; (including 25%), it is considered to obtain non-monetary assets in monetary assets, and other relevant criteria apply. The company shall disclose the following information related to the exchange of non-monetary assets in the notes:

Accounting Treatment of Asset Swap

1. If the accounting treatment without premium is calculated at fair value, the fair value of the assets exchanged plus the relevant taxes and fees payable shall be taken as the credited value of the assets, and the difference between the fair value of the assets and the book value of the assets shall be exchanged into the current profit and loss. The formula is: the book value of the assets exchanged = the fair value of the assets exchanged + the relevant taxes and fees payable.
2. If the accounting treatment involving premium is calculated at fair value, the premium will be paid in exchange for the fair value of the assets, plus the premium and the relevant taxes and fees payable, as the credited value of the assets, and the assets will be exchanged. The difference between the fair value and the book value is included in the current profit and loss. The formula is: the book value of the assets exchanged = the fair value of the assets exchanged + the premium + the relevant taxes and fees payable. The difference between the fair value of the assets and the book value of the assets is recognized as the profit or loss of the current period, and the difference between the fair value of the assets and the book value of the assets is included in the current profit and loss. The formula is: The book value of the assets exchanged = the fair value of the assets exchanged - the premium + the relevant taxes and fees payable.

The Commercial Substance of Asset Swap

The asset swap has commercial essence, which is one of the important conditions for the exchange of assets to be measured by fair value and is also an important concept introduced by the asset swap standard. In determining whether the asset swap has commercial substance, the enterprise should focus on the extent to which the future cash flow of the enterprise is expected to change due to the occurrence of the asset swap, and compare the expected ungenerated cash flow from the exchange of assets and exchange of assets or Present value, determine whether the exchange of non-monetary assets has commercial substance. Only when the difference between the expected future cash flow of the assets exchanged and the assets exchanged or the present value of the assets is large, can it be shown that the occurrence of the transaction has caused a significant change in the economic situation of the enterprise, and the exchange of non-monetary assets has commercial substance.