Company Profile and Transaction Background
Empire Industries, engaged in the consumer goods manufacturing sector, operates multiple warehouses for effective logistics. Recently, Empire Industries and Crown Corporation agreed to exchange warehouses to optimize proximity to their respective production facilities. Below are the key details of the exchange:
Comparative Table for Warehouses
| Description | Empire Industries' Warehouse | Crown Corporation's Warehouse |
|---|---|---|
| Carrying Value | Rs. 15,00,000 | Not directly relevant |
| Fair Value | Rs. 18,00,000 | Rs. 17,50,000 |
| Location | Near Crown Corporation | Near Empire Industries |
| Additional Cash Received | Rs. 75,000 | - |
Key Provisions from Ind AS 16 Relevant to the Transaction
Para 24: Measurement at fair value, unless:
- Transaction lacks commercial substance
- Fair value not reliably measurable
Para 25: Defines transactions with commercial substance as those with significant changes in:
- Configuration of cash flows
- Enterprise-specific value
Exchange Transaction Analysis Checklist
Utilize this checklist to ensure proper recognition and compliance with Ind AS 16:
| Checklist Item | Check (✓) |
|---|---|
| Evaluate the fair value of both assets exchanged | |
| Assess if the exchange has commercial substance | |
| Determine if future cash flows significantly change | |
| Check if operational values of entities are affected | |
| Confirm reliability of fair value measurements | |
| Record transaction at carrying amount if lacking substance | |
| Adjust for any cash components in the exchange |
Detailed Analysis of the Exchange
Evaluation of Commercial Substance:
- Since both warehouses serve similar roles and are geographically proximate, this suggests minor logistical changes without significant alteration in cash flow configuration or risk.
- The inclusion of Rs. 75,000 cash does not materially change the economic circumstances of Empire Industries.
Measurement of the Asset Acquired:
- The transaction lacks commercial substance; hence, the acquired warehouse is recorded at the carrying amount of the given-up warehouse, adjusted for the cash received.
Accounting Entries
| Account | Debit | Credit |
|---|---|---|
| Warehouse (Exchanged) | Rs. 14,25,000 | |
| Bank (Cash Received) | Rs. 75,000 | |
| Warehouse (Original) | Rs. 15,00,000 | |
| Entry Description | Recording the warehouse exchange and cash receipt at carrying value due to lack of commercial substance. |
Conclusion and Financial Reporting Implications
Empire Industries should record the exchanged warehouse at Rs. 14,25,000, reflecting the original carrying value minus the cash received. This treatment under Ind AS 16 adheres to the principle of recognizing the economic substance over the legal form of transactions. It provides a transparent view of the company’s asset management and strategic repositioning post-transaction, ensuring accuracy and reliability in financial reporting. This approach highlights Empire Industries' strategic operational adjustments without overstating asset values, maintaining compliance with financial reporting standards.
