Monetary or Non-Monetary?
Updated: 2023 – please scroll below to download the infographics for your future reference, it is free.
When you need to translate your items denominated in foreign currency to your own functional currency, then there’s one little problem:
Is that item monetary or non-monetary?
If you determine the nature of your item incorrectly, it can lead to totally wrong presentation in the financial statements.
It’s not so important when you consolidate and you need to translate some foreign subsidiary to your own presentation currency, right?
Why?
Because, the rules in IAS 21 The Effects of Changes in Foreign Exchange Rates say that in such a case, you translate all your assets and liabilities by the closing rate. That’s clear.
But when it comes to translating individual items and transactions in your own financial statements to the functional currency, then the rules are more complex.
Let’s take a look.
What do the rules say?
For translation of the amounts in foreign currency to your functional currency, the standard IAS 21 states that you should re-calculate all items after initial recognition using exchange rate based on characteristics of the specific item.
More specifically:
- For all monetary items in foreign currency – use closing exchange rate at the reporting date;
- For all non-monetary items in foreign currency carried at historical cost – use the historical exchange rate (at the date of transaction – thus, you keep non-monetary asset at historical rate with no recalculation);
- For all non-monetary items in foreign currency carried at fair value – use the exchange rate at the date when fair value was determined.
The principal question here is:
What is monetary and what is non-monetary?
There’s one essential characteristic that makes a difference:
A right to receive or obligation to deliver a fixed or determinable number of units of currency.
All monetary items DO have this feature. All non-monetary items DO NOT have this feature.
Once you apply this rule of thumb, it should be easy to determine what’s monetary and what’s not.
In the following table, I have summarized various kinds of items with their characteristics for you:
| Item | Monetary/Non-monetary |
| Assets | |
| Property, plant and equipment | Non-monetary |
| Intangible assets (including goodwill) | Non-monetary |
| Investments in associates | Non-monetary |
| Equity investments (e.g. shares) | Non-monetary – see below |
| Investments in debt securities | Monetary |
| Net investment in the lease | Monetary |
| Biological assets | Non-monetary |
| Deferred tax asset | Monetary – see below |
| Inventories (including allowances) | Non-monetary |
| Contract assets (IFRS 15) | Monetary – see below |
| Trade receivables (including allowances) | Monetary |
| Other receivables to be settled in cash | Monetary |
| Advances and prepayments | It depends – see below |
| Deposits and bank accounts | Monetary |
| Cash | Monetary |
| Equity and liabilities | |
| Share capital | Non-monetary – see below |
| Other components of equity | Non-monetary |
| Provisions for employee benefits | Monetary |
| Lease liability | Monetary |
| Deferred tax liability | Monetary – see below |
| Bank and other loans | Monetary |
| Accruals | Monetary |
| Contract liabilities (IFRS 15) | Non-monetary – see below |
| Deferred income | Non-monetary |
| Trade payables | Monetary |
| Advances received | It depends – see below |
| Current tax liability | Monetary |
As you can see from this table, some items are crystal clear, but some of them are not and further questions arise.
Advances paid or received
You need to assess the character and substance of every advance paid or received carefully, because some advances can be monetary and some of them can be non-monetary.
However, I have explained particularly this issue in my article on Accounting for prepayments in foreign currency under IFRS together with the numerical example, so please read there if interested.
Deferred taxation
Currently, this is a little bit unclear in the standards.
The standard IAS 12 Income Taxes indirectly indicates that the deferred tax assets and liabilities are monetary items, because it notes that the exchange rate differences on deferred foreign tax liabilities or assets are recognized in the statement of comprehensive income (par. 78).
Investments in preference shares
Investments in preference shares are another item that requires our careful judgment.
More specifically, you should assess the rights attaching to the shares.
In fact, both IAS 39 and IFRS 9 say that investments in equity instruments are non-monetary items.
It means that if terms of the preference shares lead to the shares classified as equity instrument, then they are non-monetary.
For example, the share that does NOT specify any mandatory redemption by the issuer at some future date would represent an equity instrument (or at least an equity component of a compound financial instrument).
On the other hand, if terms of the preference shares lead to the shares being classified as a financial liability, then it should be treated as a monetary item.
For example, the share that DOES specify mandatory redemption by the issuer at some future date would represent a liability.
Share capital in a foreign currency
Some companies issue their share capital in a foreign currency.
However, neither IAS 21, nor IFRS 9/IAS 39 specify whether the share capital in a foreign currency is monetary or non-monetary item and how to treat the difference.
In practice, the ordinary share capital is viewed as non-monetary item and maintained at the historical rates. The reason is that its retranslation to closing rate does not affect the cash flows of the company.
However, I have experienced the opposite in the past. A few companies treated their foreign currency share capital as a monetary item, but they took foreign exchange differences directly to equity, and not to profit or loss. In this case, total equity is the same as the share capital would have been kept at the historical cost.
Contract assets and contract liabilities
In short, contract assets are monetary and contract liabilities are non-monetary, however exceptions may exist. Please read this article for full explanation with examples.
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287 Comments
Leave a Reply
Hi,
Can you give some Examples of long term foreign currency monetary items.
Hi Santosh, e.g. long-term foreign currency loan or a bond denominated in foreign currency would be long-term monetary items.
If i receive foreign currency as advance for goods. I have recorded on spot exchange rate. However at the time of recognition of such advance as income should i calculate the exchange gain or loss.
Dear Suraj,
I think this article about foreign currency advances will help you. It speaks about property, plant and equipment, but is applicable also to inventories. S.
Thank you so much!!
If I credit sales/ revenue and debit trade receivables. Is sales a monetary item for foreign exchange rate purposes
Hi Silvia,
How are you,
I am Nidhi from India. I saw your videos on you tube and it was very impressive. I want to learn more and interested in your IFRS kit. Professionally I am chartered accountant and work in MNC,I have few question
1 Whether your IFRS KIT only helpful for students or help professionals?
2 you were asking practical examples in your tutorial video whether the example was those which we read in books during student life or practical example which we face daily.
Thanks and Regards
Nidhi
Hi Nidhi,
thanks for commenting, however, this is off the topic. Let me reply shortly:
1. I would say for both as both students and professionals are within my students.
2. Also, I would say both. The material in the IFRS Kit starts from the basics and therefore, there are some basic “student” examples, but then goes to more difficult topics and also examples are more from real life and involving complexities.
Please, if you have more questions, contact me via my contact page and I’ll get back. Thank you! 🙂
Dear Silvia,
Su again. I would like you to explain more about Share capital in a foreign currency. As I am working in foreign bank of Myanmar, presentation currency is in USD, I would like to understand how the exchange difference due to capital funds is presented. We are preparing trial balance, balance sheet daily and capital is in USD which is fixed in historical rate. Currently we took the exchange difference of balance sheet item as a revaluation reserve, not to profit and loss. The exchange rate is in downward trends nowadays. If we take it as a profit, we will make a huge net profit in our accounts. I would like to hear your opinion.
I am looking forward your kind reply. Thank you.
Sorry. Presentation currency in Myanmar is MMK (Myanmar Kyat).
Hi Silvia,
I have one question. I worked in one big bank’s finance. In end of month, their system auto-revalued all foreign currency expenses using month end closing rate. So expenses increased. Is it correct? I don’t think it follows to IFRS.
Thanks for your time.
Dear Su, you are right, this is not in line with IFRS. IFRS asks to translate foreign currency transactions by their actual spot rate. S.
Thank you.. 🙂
Hoping you can help clarify treatment of AROs / Restoration obligations likely to be settled in a currency other than a company’s functional currency. Would these be treated as monetary liabilities and retranslated at each reporting date or non monetary?
Dear Andy, yes, you are right. The reason is that ARO is a typical obligation that will be settled by spending some cash. If it’s in a foreign currency, you need to revalue it at the end of each reporting period. S.
Hi Silvia,
Thanks for this post.
I have a question. Could you please tell me the deferred tax impacts on FCTR (Foreign Currency Translation Reserve) / CTR (Cumulative Translation Reserve)?
Thank you
Sara
Dear Sara,
please can you clarify the question? Are you asking on how to treat the deferred tax when it translates to the presentation currency? Or whether to recognize deferred tax on CTR? Or…? S.
Hi Silvia,
Since Share Capital denominated in foreign currency is using historical rate.
When we have a Capital reduction, do we use the historical rate or the transaction spot rate?
In my opinion, I think it should be using historical rate.
Just wondering whether you think otherwise?
I think the exchange difference should go into OCI in company level and conso level as it is capital in nature. Right?
Interesting question. It’s not solved in the IFRS at all. I would apply historical rate and show any foreign exchange in profit or loss. Let me draft the journal entries:
– Liability to shareholders from capital reduction: Debit Share capital / Credit Liability – using historical rate
– Cash paid to shareholders: Debit Liability , Debit P/L – FX loss / Credit Cash (using actual spot rate).
If the pay out is after the end of the reporting period, then you would revalue the liability by the actual closing rate via P/L. S.
Nicely explained
Hi Silvia,
I must say you are doing great job. Thank you very much for educating all accounting community in such a simple manner. My question is IFRS is silent about using BUY rate OR SELL rate while recording transaction. Also, for example, evaluating any monetary assets at the closing date, also, which rate should be used. BUY, SELL OR AVERAGE. It may make big difference between average and BUY/SELL rate when Amounts are really big.
Thanks.
Dear Nirav,
IAS 21 in paragraph 26 states that when you have several rates available, then you should take the rate at which you would settle the liability or recover the asset at the measurement date. Practically it means – if you have USD receivable, then you use buying rate (you will receive USD and bank buys them to convert to INR), and if you have USD liability, then you use sell rate.
Anyway – you absolutely need to be consistent and use the same principles every time. Hope this helps! S.
Hi Silvia,
What a great article! so I work for a publishing company where our magazines are sold on a sale and return basis. On day one we accrue for what we expect the final sale to be and our distributor will the pay us say 70% percentage of the anticipated final sale at the exchange rate on the day. 6 months later they pay say, 20% of the final anticipated sale at the exchange rate on the day and when the magazine comes off the shelves they will true up the final 10% at the exchange rate on the day. I assume that this is a monetary item but how would you treat the fx gains and losses?
Omg, this is so helpful! I’m preparing FS for a company for the last 8 years with share capital contibutions in different currencies spread over the years :-O
I enjoy your way of writing really enjoy this website.
Hi Sylvia,
Great stuff on the website, thanks.
Is intercompany payables (when a branch owes its parent company) monetary or non-monetary item?
The parent company (a) funds the branch or (b) pays the 3rd party invoices and recharges back to the branch.
Thanks in advance!
Hello Sylvia,
Thanks for sharing such great insight.
A quick question.
My functional currency is dollar.
Assuming I acquire a loan of £10,000 at a spot rate of $1.2/£ in March and used the loan to acquire (Plant) PPE costing £10,000.
Giving that $/£ is 1.5 in December
When preparing the financials in USD at year end, do I state the PPE at $12,000, Loan at $15,000 and Loss of $3,000
OR restate the PPE at $15,000 with a corresponding gain of $3,000?
Hi Alfy,
you do not restate PPE – it’s a non-monetary item. The first option is correct. S.
Thank you Sylvia.
Am grateful.
Dear Ms. Sylvia,
As per IAS 16.24 – Exchange of Non-Monetary Fixed Asset
Is it right or in line with the IAS to record Gain on Exchange of fixed Asset immediately? (its similar in nature)
Thanks and regards,
Lenlen
Hi Silvia. One question. I´m from Argentina. I work in a company which functional currency is USD. Income tax are calculated and paid in local currency (ARS). Quarterly we calculate deferred tax income taxto report our figures to headquarters, obviously in USD. However, the deferred tax asset/liability, must be consider as a balance in ARS or USD?
Thanks
Regards
Diego
Diego, I’m not sure I understand your question. If you pay taxes in ARS, then your deferred tax is ARS asset/liability because it will be cleared in ARS in the future. Is that what you asked? S.
Yes, you answered my question. Thanks!
Hi Silvia,
This article you have posted is very informative.
I myself am studying US GAAP.
Under US GAAP, for consolidation of foreign subsidiaries, I have understood that first I need to re-measure the financials of local currency to functional currency using Temporal method. To apply the method one should clearly identify monetary and non items in FS.
Please let me know whether I can reasonably assume that the classification details you have mentioned in this post hold good under US GAAP too?
Hi Anil,
in general yes, I think so – the above table would do well also under US GAAP. S.
Hi, is the obligations under finance lease and pension benefits to be paid is monetary? And why?
Hi silvia
what kind of transaction is exchanging A/R with land?
for example customer owes 100000 but instead of cash they are giving 150,000 land.
Dear TH,
receivable is still monetary asset and a land is non-monetary. S.
Hi Silvia,
Is deferred expense monetary or non-monetary?
Non-monetary.
Hi Sylvia,
I.t.o. the latest IFRS, is there any scenario where exchange losses may be capitalised to an asset? Some years ago SIC11 made provision for this (if certain criteria were met) but it was subsequently superseded by IAS21.
Please let me have your thoughts.
Thanks
Hein
Here is a challenging one for me. Is Work in progress derive from rendering of services monetary or non-monetary?
Also Work in progress (WIP) is a current asset. In relation to impairment of WIP which IFRS should I use to address this?
Fae, the same question again: is there a right to collect cash or some other financial asset in the end? I guess that no in the case of WIP, so I would say it’s non-monetary. S.
Hi Silvia,
Thanks for your article.
It’s make me more clear when doing the translation process for changes in functional currency (eg: USD to GBP).
Nonetheless, there is one question came across my mind that what if the company function currency (eg: GBP) change back to USD in future (eg: 3 years later).
Then how is the accounting treatment of the ‘translation differences’ recognised in other comprehensive income arises from year 1 to year 3. In the other word, there will resulted a ‘translation reverse’ to be show in the statement of changes in equity for those translation differences.
My thinking is to realised all the translation reserve to retained earning at the financial year when the functional currency change back to USD(eg: in year 4).
But, I not sure it is practicable or any Accounting Standard to refer.
Thanks.
P/S: Assuming the financial statements are all the way present in USD.
Best Regards,
Leonard Lim
Hi Silvia –
Our company paid expenses on behalf of a client to gain their business for 5 years. The client agreed to pay us the cash value of the unamortized portion of the expenses we covered if they terminate the contract early.
Would you consider this monetary or non-monetary?
p.s. your site and materials are a great resource! Thank you!
Hi Jeff,
is there a right to receive the cash? I guess not – only if the possibility of terminating the contract early is probable. If it’s not probable, then it’s non-monetary. S.
Correct, we do not have the right to receive cash unless a contract termination takes place. So, classification of non-monetary makes sense.
Thanks!
Hi Silvia,
An entity is having a tax exemption for next 10 years. Whether its a monetary item or not. Whether it van be recorded as intangible assets
A license which is transferable, hold by company is a monetary item or not. Whether it can also be recorded as intangible assets in the company balance sheet.
Hi Silvia
Thank you for your material and Could you make clear me further about Share capital in a foreign currency.
It is not clear me about your comment “they took foreign exchange differences to the statement of other comprehensive income, and not to profit or loss. In this case, total equity is the same as the share capital would have been kept at the historical cost”
Thank you
Dear Silvia,
The article is indeed very interesting and helpful. I have one question: what are the advances paid to staff e.g. salary advances or advances for work-related travel – monetary or non-monetary items?
Thank you in advance!
Kind regards,
Svetlana
Hi Svetlana,
are you paying the salaries in a foreign currency? hmmm, interesting.
Anyway – is there a right to get the cash back in the future? From the practical point of view, I would treat work related advances as monetary items (because your employees will need to make a settlement and pay you something back). I would treat the salaries in the same way, although you can argue that these advances are already earned by the employee. It depends on when you pay them, too. S.
Hi Silva,
Really helpful article and website but was just hoping for a little more guidance. I work in Myanmar where the functional currency is kyat and reporting currency is USD. Our parent company is based in Singapore with reporting currency USD. They invested $25,000 share capital into each entity. This of course got translated at historical rate into kyat and is now valued as approx $23,500. For the purposes of intercompany reconciliations surely the $25,000 invested would need to be held as $25,000 now to match between the companies? You mention being able to revalue this to the OCI, rather than P&L, which then presumably would mean that share capital would become $25,000 and the the FX would be recognised through equity at -$1,500. On my accounting software, Xero, I cannot see an OCI – can I create an account and post directly to the balance sheet?
Please let me know if I have the right understanding! Thanks,
Sarah
This a very good site to understand the things in simple manner without making things ambiguous and making others confused.
Hi Silvia
I am pretty happy to see this website. It is very useful as things are explained with ease
I wanted to know something more on the translation of foreign exchange balances:
For example: If the functional and presentation currency is USD and there is a bank account in say GBP (Great Britain Pounds). If the transactions are carried out and balances are held in the GBP denominated bank account only for transactions carried on by a client and not for the Company’s use should the company still revalue this bank account to USD at the reporting date exchange rate (i.e. like a monetary item) or it can tally the bank recon in GBP and USD balances to be reported would the original GBP transactions converted to USD at the rate on the date of transaction?
It shall be of great help if you can guide me on this
Many thanks
Anil Lohidakshan
Hi Silvia,
Am an ACCA Member from Sudan and i beleive your articles is very interesting and quite simple.
Thanks alot for your help.
Isam Warsama
Hi Silvia,
This question is related to conversion as well as consolidation.
Please confirm If my understanding is correct for the loan given by holding company to its subsidiaries.
Short term (current) loan given by Holding to subsidiary, if any exchange difference (due to difference exchange rate in the respective region) , it should go to P&L considering Monetary items
Quasi loan (Long term)- given by Holding to subsidiary,
if any exchange difference (due to difference exchange rate in the respective region), it should go to Foreign currency translation reserve (under equity) considering that it is Non-Monetary items.
Kindly confirm!
Thanks in advance.
Manish
Dear Silva,
my question goes thus:
Is loan a monetary or non-monetary item & what effect did loan has on the financial statement when running the exchange difference?
Loan is a typical monetary item. And I’m not quite sure what you’re asking in the second part of your question – if the loan is in the foreign currency and you need to translate it to your presentation currency, you need to use year-end rate and any difference is recognized in P/L.
Hi Sylvia.
Please, my company paid in advance for some items. These items had not been delivered to my company as at year end.
In translating my financial statements to a presentation currency for reporting purposes, should I use the rate at the day the payment was made since there has not been any movement in the amount as at year end or do I use closing rate?
Thanks for your response.
Hi Ify,
this is the question related to advances paid. Please refer to this article and you’ll find your answer: http://www.cpdbox.com/accounting-for-prepayments-in-foreign-currency-ifrs/
S.
Yes it does help. Thank you.
Hi Sylvia. Thanks a lot.
My company records transactions in USD but wants to report in another currency. Hence, the financial statements will be translated from USD currency to the other currency
If I understand you correctly, Property plant and equipment should be translated at the rate on the day the items were bought.
Please I’m not so clear on the rate for Accumulated depreciation. Depreciation does not occur in a day, it occurs throughout the year hence, average rate is used to translate it from USD to the other currency in income statement. So, what rate should I use for Accumulated depreciation?
Thanks for your response
Hi Ify,
yes, not everything is perfect 🙂
For translating to functional currency: Accumulated depreciation is translated with the same rate as the cost, because once you translate your PPE to the functional currency, then it’s no more asset in the foreign currency.
However, you are asking about the translating to the presentation currency and that’s the different thing. In this case, you do NOT translate PPE at the historical rate, but at the CLOSING rate at the balance-sheet date. The same with accumulated depreciation.
Hope it helps
S.
Hi Silvia.
I hope this message find you well. I am from Brazil and I work in a company that reports the statements in accordance to the IFRs purposes. My question is related to the monetary and non monetary principles. Considering that my local currency is reais and Brazil is not longer a hyper Inflationary economy. Based on that, 99% of the inventories have been translated as non monetary item. However, we have some inventories that are being managed only locally (no exportations) which the currency are managed only in Reais (i.e. Ethanol and Sugar). So, I am wondering if in this case, I have the possibility to keep it as monetary item considering these inventories as exception. Is it allowed by the IFRS/ IAS ? Is there any memo or documentation from the IAS ?
Hi Renato,
I understand your concerns, but unfortunately no, inventories are non-monetary item as there’s no right to receive cash in the future. S.
crystal clear Silvia. Thank you very much.
Accounting for financial instrument
Thank you very much Silvia for clarification
Hi
Great job and here’s my question.
If an invoice is billed in one currency and paid in a different currency at a later date
What rate should the invoice and Payment be recognized at?
Hi Reshma,
initially, you recognise the invoice with the rate valid at the date of transaction (which is the date when the liability was created – or the supply date and it should be stated on the invoice) and the payment at the rate valid at the payment date. The difference is recognised in P/L. S.
Investment (in subsidiary) held for sale would be classified as current or non current
Thank you very much Silvia for clarification ,really the topic is confused for us.
but some time your answer is very brief eg Evase question.
Hi Amel,
sometimes the questions are not very clear to me and I need additional explanation – e.g. Evase questions.
It’s encouraging to see how simple you make IFRSs for the masses. The profession needs more people like you! Keep it up.
Hi,
Kindly explain in case of Monetary items the exhange rate difference is taken to Profit or Loss account or to comprehensive income?
Thanks
Rajesh
In profit or loss when you translate to your functional currency.
For the first time in my life i feel like i can conquer any Accounting problem. Thanks Silvia
Hello Silvia,
Thank you for your training on IFRS its really helpful.
I have a question;
my presentation currency is USD and my functional currency is Rwf( Rwandan Francs), i received a loan of USD 1,000, the exchange rate was Rwf 700/USD then at the end of the year i had an exchange loss of Rwf 500 in my P/L but i want to translate the financial statements into presentation currency,
my question is, will i translate even the exchange loss using the average exchange rate or i will ignore it.
Thank you.
Is your exchange loss of Rwf 500 already realised? Yes, you should translate it, too.
yes silvia
u nid to translate even the exchange loss
It is indeed the best website and useful information.
Thanks
Oneua
Hie Silvia. I liked the document. So confirm that if we are reporting under hyperinflation we do not restate the Deferred tax liability?
its extremely helpful for me
Thank you so much !!!!
Hi Silvia – your stuff is really brilliant. They should make a James Bond movie with you in it as a forensic accountant tracking down the ‘baddies’.
LOL 😀
Thank you so much miss Liz. I am just a freshmen college student struggling in online classes and your articlea helped me a lot to remind me to keep on going.
May you be blessed!!
Hi Silvia! Thanks for all the information that you share with us.
I have a question, in the company that i work, for IFRS purposes, we had to differ revenues for services in a Venezuela´s subsidary.
So, we have a Deferred Revenue in our financial statements.
My question is, when we made the calculate, the amount was converted at average rates… that was for 2013 when the exchange rate was 6.3, but in 2014, they had a devaluation, and the close exchange rate was 49.99 and the average rate was 30.61…
Should we reduce the “deferred income” ? and what exhange rate we have tu use,
because really I can not identify whether it is a monetary or non-monetary item.
Really I appreciate a reply.
Best regards,
Liz.
P.D: I´m sorry for my english language. Im from Colombia.
Hi Liz,
well, I should have clarified that an article deals with non-hyperinflationary economy. Your case seems like Venezuela was hyper inflationary (from the crazy movement in foreign exchange). In fact, you should restate your comparative figures in line with IAS 29 and IAS 21 paragraph 43. S.
Thank you!!!
Hi Silvia,
Deferred revenue under hyperinflationary economy…
In the company am working with, the reporting currency is different from USD, however, the majority of transactions are being conducted in USD. A big part of our deferred revenue is in USD currency.
Since deferred revenue is non-monetary item, for B/S, this can be restate your comparative figures in line with IAS 29 and IAS 21 paragraph 43. S. at balance sheet date. What is treatment for the amount being released into P&L? What rate to use, prevailing rate when the invoice was issued or prevailing rate when the revenue is recognized?
Thank you for clarifying this.
Liz, any thoughts on how to go about accounting for on Day 1 and Day under IFRS for exchange of a note receivable for services rendered for preferred shares with a redemption schedule?