Nonreciprocal Transfers

Definition

The financial accounting term nonreciprocal transfers refers to the disposition or acquisition of an asset through a donation or a gift.  Companies can both donate property as well as receive gifts of property.  These are referred to as nonreciprocal transfers because the transaction occurs in one direction.

Explanation

An inflexible interpretation of accounting principles would indicate the value of the asset transferred would be zero since no compensation of any form was paid for the gift or received for the donated property.

Recording the transaction at zero ignores the economic benefit provided by the asset transferred.  When a nonmonetary asset is transferred, its fair market or appraised value should be used as the basis for journal entries.  Furthermore, if there is a difference between the book value of the asset and its fair market value, the loss or gain on the transaction should be recognized.

Double entry accounting rules dictate an accompanying journal entry.  Generally, nonreciprocal transfers involving cash such as tax rebates and subsidies flow through the income statement; while the transfers of nonmonetary assets are booked to donated capital.

Example

Company A is donating one acre of land to the City of Hoboken.  Company A paid $50,000 for the land back in 1990; however the appraised value of the property is now $400,000.  Land is never depreciated, so the historical cost is the current book value of the asset.

The journal entries to record the transaction would include for Company A:

  Debit Credit
Donation of Land $450,000  
Land   $50,000
Gain on Sale of Land   $400,000

The donation of land would flow through Company A's income statement as an expense of $450,000.  Thereby providing Company A with an income tax benefit.

As noted above, a transfer of a nonmonetary asset to the City of Hoboken would require the following journal entry:

  Debit Credit
Land $450,000  
Donated Capital   $450,000

Related Terms

balance sheet, additional paid in capital, acquiring assets with stock, exchanges of plant, property and equipment