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Meaning of Commercial Substance under IFRS

Commercial substance:

Commercial substance means that the risks and cash flows associated with one asset would differ from those of other asset. Under exchange, the risks and rewards & cash flows are not going to be incurred had the exchange not happened. The timing, amount and risks should all substantially match.


AV Ltd acquires 20 acres land in India from B Ltd in exchange of a 50 storey building in the UK it owns. There is no money exchanged between A & B. AV Ltd would need land in India for its construction business. The property in the UK remained idle, and did not reap many benefits.

B Ltd, on the other hand, required a property in the UK to set-up a business there. However, fair values of the assets cannot be determined since there is no basis of calculation of the fair value in India or the UK.

The building is having a carrying amount of $500,000 in the books of AV Ltd.


Although there is a commercial substance since the risks, timing and amount of cash flows associated with the building AV Ltd are different from those of the land acquired, the fair value criterion is still not met. In the above example, land would be shown at a value of $500,000 in the books of AV Ltd as there is no fair value identified for either of the assets.


AV Ltd exchanges an oil field it owns in UAE with a similar size oil field in Russia from B Ltd. The cash flows associated with the oil fields are same with regard to risks, amount and timing since the oil prices get affected by global needs.

The carrying amount of the oil field it owns in the UAE is $500 million.

In the above example, it is not known if the fair value of the assets can be identified. However, the commercial substance of the transaction does not exist. Therefore, the Russian pipeline acquired by AV Ltd in exchange with the other pipeline would be shown at the carrying amount of the asset given up.


AV Ltd exchanges a building with a carrying amount of $1m with land from TV Ltd. The fair value of land is $1.5m. Fair value of the building is 1.45m. You are required to calculate the value of land in the books of AV Ltd. Show appropriate accounting impact of the transaction.


Since the above transaction would meet commercial substance, and also that fair values of assets under exchange are available, the incoming asset (land) is shown at its fair value of $1.5m. Difference between the carrying amount of asset given up (building) and asset acquired under exchange is realised gain $500,000 (1.5m – 1m). The accounting impact of above transaction is:

Debit Land (asset acquired under exchange) 1.5m

Credit Building (asset given up) 1.0m

Credit Gain (SOCI) 0.5m

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