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An entity may enter into an exchange transaction with the same counterparty for the purchase and sale of inventory in the same line of business. Following the adoption of ASU 2014-09 and ASU 2017-05, transactions in which an entity exchanges inventory for noncash consideration (other than inventory) may be within the scope of ASC 606 (if the counterparty is a customer). Prior to the adoption of ASC 606, and for transactions that are not with a customer, the guidance in ASC 845 is applicable for exchanges of inventory (without other forms of non-cash consideration). ASC 845-10-25-3A through ASC 845-10-25-4 concludes that these transactions should be combined and considered a single arrangement when the transactions were entered into “in contemplation” of one another. There are several indicators to be considered in assessing whether two transactions are entered in contemplation of one another (the following indicators are not all inclusive, nor is any one determinative):
  • A specific legal right of offset of obligations exists between the parties to the transaction
  • The transactions are entered into simultaneously
  • The transactions are entered into at off-market terms
  • There is relative certainty that reciprocal inventory transactions with the same counterparty will occur
ASC 845-10-30-15 concludes that an exchange within the same line of business of finished goods inventory for the receipt of either raw materials or work-in-process inventory should be accounted for at fair value, if fair value is determinable within reasonable limits and the transaction has commercial substance. An entity should make its determination of whether the inventory surrendered is finished goods and whether the inventory received is something other than finished goods based on the classification of such inventory for financial reporting purposes. Conversely, ASC 845-10-30-16 requires an entity that receives raw materials, work in process, or finished goods in exchange for raw materials or work-in-process inventory within the same line of business to measure the transaction at the carrying amount of the inventory transferred. ASC 845-10-30-16 also requires that the transfer of finished goods inventory for the receipt of finished goods inventory within the same line of business be recognized at the carrying amount of the inventory transferred. See ARM 1300.13 for guidance on exchanges of software.
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