View Policies Current Attempt in Progress Noncash consideration is
A recognized on the basis of the fair value of what is given up.
B recognized on the basis of the fair value of what is received.
D recognized on the basis of the fair value of equivalent goods or services.
D recognized on the basis of the original cost paid by the customer.
The correct answer and explanation is:
The correct answer is B: recognized on the basis of the fair value of what is received.
Noncash consideration refers to any form of compensation or exchange that is not in the form of cash, such as goods, services, or other assets. In accounting, the recognition of noncash consideration is based on the fair value of what is received, rather than what is given up. The rationale behind this is that the entity is receiving something of value (whether it’s goods, services, or assets) and should account for it based on what is being received, as it reflects the economic substance of the transaction.
For example, if a company sells a product but receives services in exchange rather than cash, the company should recognize the value of those services as revenue. The fair value of the services (or goods) received can be measured by determining their market value, which can include comparable transactions or appraisals depending on the circumstances. This helps ensure that the financial statements reflect the true economic benefit that the company is gaining from the transaction.
Recognizing noncash consideration based on what is received also helps prevent overstatement or understatement of revenue. It aligns with the accounting principle of fair value measurement, which aims to ensure that the recorded amounts represent the current market value rather than the historical cost or any other potentially outdated measure. Therefore, by recognizing the fair value of what is received, an entity ensures that its financial reporting accurately reflects the value it is obtaining in exchange for its goods or services.