A General Model for Cost Estimation in an Exchange

Current Generally Accepted Accounting Principles (GAAP) state that the cost of an asset acquired for cash is the fair value (FV) of the amount surrendered, and that of an asset acquired in a non-monetary exchange is the FV of the asset surrendered or, if it is more “clearly evident,” the FV of the acquired asset. The measurement method prescribed for a non-monetary exchange ignores valuable information about the “less clearly evident” asset. Thus, we suggest that the FV in any exchange be measured by the weighted average of the exchanged assets’ FV estimations, where the weights are the inverse of the variances’ estimations. This alternative valuation process accounts for the uncertainty involved in estimating the FV of each of the asset in the exchange. The proposed method suits all types of exchanges: monetary and non-monetary. In a monetary transaction, the weighted average equals the cash paid because the variance of its FV is nil.