Barter exchange takes place when a person or business entity provides a good or service and receives a good or service in return, rather than receiving cash or another monetary instrument. Accounts still have to track these exchanges but cannot rely on standard purchase receipts to record the transaction. There are two predominant global accounting systems: the International Financial Reporting Standards, or IFRS, and the U.S. Generally Accepted Accounting Principles, referred to as U.S. GAAP or GAAP.
IFRS and Barter Transactions
IFRS standards for recognizing revenue mandate that a reliable estimate is provided for nonmonetary sales. Per International Accounting Standard 18, no barter sale can be recognized without such a measurement. Most contemporary bartering is for trades between advertising services, so the International Accounting Standards Board, or IASB, issued a specific ruling detailed in SIC-31, Revenue - Barter Transactions Involving Advertising Services. In these cases, businesses exchange ad time or ad space for other ad time or ad space.
SIC-31 provides a framework for applying fair market value to advertising services. The basic process involves analyzing previous, non-barter transactions that involved similar advertising services. Per IFRS guidelines, these non-barter transactions can only be used if they occurred frequently and did not involve a third party that was also used in the barter exchange.
U.S. GAAP and Barter Transactions
Under the U.S. GAAP system, barter transaction is defined as two parties exchanging goods or services without cash payment. Much like with IFRS, the overwhelming majority of these barters involve advertising services. U.S. GAAP also looks for a fair market value estimate based on prior, non-barter transactions to record a barter sale; however, the primary difference between GAAP and the SIC-31 is that GAAP has a way to account for circumstances where a fair market value cannot be successfully estimated.
Pursuant to the ruling made by the Emerging Issues Task Force in 1999, if no estimation of historical data is available, the revenue from a barter transaction is recorded at the carrying value of the asset given up (this value is most likely zero). In the first case, the item recorded is called Nonmonetary Transaction, Amount of Barter Transaction. In the latter case, the item recorded is Nonmonetary Transaction, Fair Value Not Determinable.
Note About Barter Credits and Third-Party Barter Exchange
These descriptions do not cover transactions through third-party barter exchanges, where individuals or businesses trade commodities in exchange for barter credits, or "points," to be used later. Since the points act as an informal medium of exchange and these are not direct transactions, they are a separate issue from traditional barter transactions. In the case of a transaction that involves barter credits, GAAP allows for standard revenue recognition in such cases where the barter credits are readily exchangeable for a cash instrument.