Final answer:
The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is recorded at the fair value of the asset given up, and a gain or loss is recognized when the exchange has commercial substance.
Step-by-step explanation:
The cost of a nonmonetary asset acquired in exchange for another nonmonetary asset is usually recorded at the fair value of the asset given up when the exchange has commercial substance. This approach is taken because it most accurately reflects the economic cost of the transaction. A gain or loss is recognized in the process, which will affect the company's income statement. The fair value is preferred because it provides a measure of the economic reality of the exchange rather than just a historic cost that may not be relevant.
A company usually measures the cost of the nonmonetary asset it has received at the fair value of the asset given up, but it may use the fair value of the asset received if it is more clearly evident. The rationale behind this is that the fair value is a more relevant and reliable measure of the exchange's economic effect, as it represents the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Recognizing gains or losses on these transactions provides users of financial statements with better information about the consequences of such exchanges on the company's financial position and performance.