Monetary Assets consist of those assets that have a value to pay or receive in a fixed number of units of currency. However, before we delve into monetary assets – let us try to understand why an asset will be monetary or non-monetary. What is the reason for having this distinction? Accounting Standards Board of India and GAAP have defined both of these terms. Each of them serves a purpose, and the distinctions are important to understand.
Defining Monetary and Non-Monetary
When one thinks of monetary assets – one question comes to mind. Are not all assets monetary? Technically speaking, a monetary item is that which has a fixed value in a particular currency. The fixed value does not change even if the purchasing power of the currency changes with inflation.
- Defining Monetary and Non-Monetary
- Monetary and Non-Monetary Items
- Need for Defining Monetary Assets
- Non-Monetary Assets
- Assets Can be Either Monetary or Non-Monetary
- Treatment as per International Standards
- Year-End Reporting
Monetary and Non-Monetary Items
To understand monetary items, we need to distinguish between monetary and non-monetary.
A non-monetary item changes its value and does not have a fixed value in a currency with the change in time. A monetary item has a fixed value that does not change with time. An example of a non-monetary item could be land, plant, machinery, etc.
Another important distinction is the quick convertibility of monetary items into cash. Non-monetary items will have issues with conversion due to various other factors, as we will see ahead.
Change in Real Terms
Though monetary items have fixed dollar value but are subject to relative changes such as in purchasing power, for instance, an amount of $1000 can only buy you one bicycle now, and earlier it bought you two bicycles if you compare it to situation 5 years back. This means the role of inflation and changes in the value of a dollar will remain.
Unlike non-monetary items such as land, the value of monetary items is never restarted. For instance, real estate prices are subject to appreciation and depreciation, depending on the market sentiments.
Need for Defining Monetary Assets
For stability of accounting, monetary assets are those whose value does not change over time. An asset of $20,000 today will still be $20,000 even after one year. Having a stable value over some time is a must for an asset like cash. This will measure all the other assets that the company holds or has on the balance sheet. A monetary asset will not lose or gain value over some time. Therefore, you can measure and record all assets on books of accounts.
Examples of Monetary Assets
- Investments in debt securities
- Net investments in the lease
- Deferred tax asset
- Trade receivables
- Cash is the mode of settling Other receivables
- Deposits and bank accounts
These are usually – plant & equipment, intangible assets such as goodwill, inventory, and property. Machinery valuation depends upon how obsolete it has become compared to advancements in new technology and supply-demand ratios. These measures are specific to non-monetary assets.
Assets Can be Either Monetary or Non-Monetary
Assets such as prepayments or advance payments can either be monetary or non-monetary since it is based on the contract with the party to which payment was made. If the pre-payment amount is non-refundable or no contract exists, and the probability of getting the money back is quite low, then the accountant can treat it as a non-monetary asset.
Further, in such a case, you can’t treat it as monetary because monetary assets are in terms of cash.
Treatment of Shares
- Preference shares might be treated as monetary assets if the contract has a clause for the redemption of shares by issuing entity. If the clause doesn’t exist, we can treat the share as a non-monetary asset.
- The lack of clear directives allows the treatment of equity shares as monetary assets in most foreign countries.
Treatment as per International Standards
As per the International Accounting Standards, IAS 21, the current exchange value is used to restate and record monetary assets. At the same time, non-monetary assets are kept on the books of accounts at the original or historical prices.
The closing rate is the basis of translating or recording monetary assets. When monetary assets arise as a result of foreign currency transactions, the following situation might arise:
- If the transaction settles in the same accounting period of the occurrence of the transaction, the exchange difference recognition should be in that period.
- Suppose the transaction settles in a subsequent accounting period. In that case, the difference is recognized in each period up to the date of settlement by the change in exchange rates during each period.
Thus, the two main components of differences between Monetary and Non-Monetary Assets are –
- Change in Value
You can now view a company’s financial statements and understand which are monetary and which are non-monetary assets. The monetary assets help in the day-to-day functioning of the company and operations. Fixed and Intangible assets are part of infrastructure as well but are Non-monetary assets due to longer time valuations.