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
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Hai,
From your thoughts on Share capital in a foreign currency i have a question, does this treatment also apply on available for sale equity investments??
Hi Silvia,
Can the company revise the re-calculate at the beginning of next year? If it can, the (unrealized) currency translation income/loss goes to P&L??
When can the company recognize that unrealized currency translation income/loss goes?
Many thanks in advance!
Hi Silvia,
thanks for this article. I have a question regarding IFRS 16 where the contract and lease payments are expressed in a currency which is different than the functional currency. The lease liability is monetary, but what about the right-of-use (ROU) asset and the amortization? If they are non-monetary as intangible assets are, during the lease term at every closing date the lease liability would change because of changes in the exchange rate, while the ROU would remain the same. Is that correct?
Dear Silvia,
Good day.
I do facing some special condition for monetary and non-monetary categories argument from my client.
As your article mentioned, Cash and bank balance, Trade receivables and Trade payables are consider monetary item. Under FRS 21, monetary item should be revalue as at closing rate for each financial year end.
However, my client is operated as a reinsurance broker company and they claim that the premium and claims they receive on behalf from/to client is consider non-monetary item (the company act as middle man), therefore, the management are not willing to recognise the unrealiased foreign exchanges gain/loss to profit and loss account, but wish to presented it as “New liabilities account”. (P/s : Functional currency : SGD, The bank a/c is in USD)
Please advise how should I reply my client about the above scenario. Thank you in advance.
From : Areal
Hi Areal,
the broker acts here as an agent, but they still have the right to receive cash from the end customers (premiums) and the obligation to transfer cash to the insurance companies (premiums). The same for the claims: They still have the obligation to pay to end customers and at the same time, the right to receive cash from the insurance companies – if this is the way it goes. Therefore, all these receivables and payables from claims and premiums are monetary. I just wonder what their argument is. S.
Dear Silvia,
Thank you for your prompt response. Really Appreciated.
The point for their argument is they not willing to post the unrealised gain/(loss) to Profit and loss accounts for the bank account year end valuation (from USD to SGD @ closing rate). Its would significant if the Bank account balance as at year end is few million and the exchange rate USD vs SGD is drop.
If they keep the valuation difference at Balance sheet, then the profit and loss account would appear net profit instead of net loss.
Thanks and regards,
Areal
Areal, IFRS is quite determinative and it does not take into account this type of talk (if it’s negative impact, we don’t do it…). In fact, they want to depart from IFRS due to negative impact, thus they want to hide losses. I am sorry, but that’s not how to do this. S.
Dear Silvia,
Yes. Noted with thanks. I will do the right things and stand to the right points instead.
Best regards,
Areal
Hi Silvia,
Great article. How is GRNI classed? I have a situation with stock in transit where the inventory has been recognised along with a liability (invoice not yet received so GRNI). Is the associated liability non-monetary because it relates to inventory or monetary because it is a trade payable?
Thanks in advance!
Hi Nick, it’s monetary, because it is not tied to inventory anymore – there’s the obligation to make a payment after all. S.
Thanks!!
Hi Silvia,
Very useful information – thank you!! I am now using your website as a regular reference tool.
I have a quick questions for your – I understand that preferred shares that considered a liability by the issuer are considered a monetary item. How are the same shares considered by the holder – are they an investment in associate and therefore non-monetary or are they a loan receivable and therefore monetary??
Thank you in advance for your help!!!
Hi Silvia, is a creditable withholding taxes a monetary or non monetary item?
Monetary.
Sylvia, thanks for the support. We use the financial figures of the company in USD for the corporate income tax return. The fiscal balance and P&L are based on the aforementioned financial figures in USD.
The taxable amount is determined first in USD based on a USD balance and P&L. The filing of the corporate income tax return in a foreign currency in this case USD has been granted by the tax authorities (country in Europe). The amount of corporate income tax due is denominated in Euros. For purposes of determining this amount, the functional currency taxable amount in USD is converted into Euros using the average currency exchange rate of the financial year.
Hello! I have a question regarding a deferred tax liability valuation. We have an asset valued, booked and depreciated in USD, but we pay taxes in EUR. How should we value the deferred tax liability? Is this USD because this results from the book value and depreciation or is the currency triggered by the payment currency towards the tax authorities? In other words, do we need to revaluate the deferred tax liability over the coming decades through profit and loss (or OCI?).
Hello Sylvia, could you please support me with the question?
Thanks Freddy.
Hi Freddy, sorry for omitting your question earlier. My question is – what is your functional currency? Is this EUR or USD? It’s not clear from your question. Anyway, as the asset is probably PPE, it should be stated in the historical cost translated to your functional currency by the historical rate and then it does not move. If your functional currency is EUR, then you simply book deferred taxes in EUR. If it’s not EUR, then you would still calculate the tax in EUR and translate it at the closing rate at each end of the reporting period (it’s monetary item). S.
No problem. Thanks for the answer Sylvia. The functional currency of the company is USD. The deferred tax is currently booked in EUR and the asset is indeed PPE. Revaluations of EUR to USD takes care for fluctuations in the P&L. Is there a way to include these fluctuations in OCI as the deferred tax position relate to future years? Thanks Freddy.
Just to make sure that you have all the facts; the corporate income tax return of the company is also in USD calculated. Ultimately the final tax liability is translated from USD to EURO in the year of reversal of the deferred tax (realization).
OK Freddy, so why are you paying tax in EUR and how do you calculate your current income tax? Do you first translate all income/expenses to EUR and then translate? Can you describe?
Hi Silvia.
It is clear that inventories are considered to be non – monetary items. However, what about inventories in transit? More specifically, in the case that the Company has a contract with the client to deliver these goods, the Company has a right to receive cash. If at the year – end the goods were not delivered and under the shipping terms the ownership of the goods is still on the Company (stock recognized as goods in transit) shall we consider them as monetary items?
Many thanks in advance.
Good day! Can I ask what is the proper rate that I should apply when I translate a NON-ADJUSTING subsequent event but requires disclosure. My client contracted a significant lease liability after the balance sheet date but before the audit report, therefore there would be no lease liability in B/S. But how should we present the transaction at the Notes? Should I still use the B/S closing rate or the date of contract rate with explanation appendage?
Hi Ivan, IFRS do not state anything about this particular circumstance, so just translate it with the transaction date rate and give appropriate explanation. S.
Hi Silvia
My question is on whether exchange differences should be disclosed above earnings before interest, tax & depreciation (EBITDA) or it should be disclosed below EBITDA.
What determines such disclosure options?
With thanks.
Lael, let me tell you that IFRS do not state the exact order of items in your profit or loss, they just state the minimum content. Also, EBIDTA is not defined in IFRS as it is non-accounting measure. However, logically, you should report forex differences in the same line as the items to which they are related. For example, if it’s forex on translation of payables resulting from operating activities, then forex difference should be reported within EBIDTA (not below). S.
Thanks Silvia. Much appreciated.
Hi Silvia,
My company (GBP functional currency) has an equity accounted investment in a third party who reports in Euro’s. Our initial investment and subsequent share of their net income have been recorded in Euros in our books, which are converted to a GBP equivalent using the rate on the day.
My question is, should we revalue our investment using the month end rate?
Many thanks in advance.
Hi Matt, in general, equity investments are non-monetary items and they should not be revalued, but kept at historical cost. S.
Hi Silvia,
Is retained earnings monetary or non-monetary? Do we need to translate retained earnings in foreign currency using closing exchange rate at the reporting date?
Thank you in advance.
Non-monetary. If you translate transactions to the functional currency – No.
Hi Silvia
The company i am working have a loan in foreign currency which was translated into presentation currency using year end rate and the difference was recognised in P&L account , unfortunately in our
case it was loss. Now while filing tax returns our tax authority is not allowing us to claim this as an expense since we have not started repayment. I would appreciate as to what is the rule in your country.
Thanks and looking forward to your response.
Sonam Choeden
Bhutan
Dear Silvia
Please help to identify whether the VAT receivable is monetary account. We are eligible to net off the difference between input VAT and output VAT. Therefore we get cash for difference. However, for those VAT output claimed back which were not confirmed by Tax Authorities (due to paperwork) we can claim the balance to be netted without cash return. While it sounds like non-monetary, there is still option to get cash for part of the built VAT receivable.
Thank you in advance
Olga
Olga, this is a monetary account, because in fact, you have the right to receive cash (although it’s technically netted off with your next VAT payable). S.
Hi Silvia,
Thank you for this write up. However, i have a question as follows:
There is an Long Term Loan in USD from a related party (a subsidiary within the same group).
Is this a monetary or a non-monetary item?
Should the loan be revalued at the closing rate of the local currency?
Thank you in advance for your response.
Monetary. Yes, it should.
Hi Silvia,
what if our company received training fee in advance for 1 year,and we record it as deferred revenue, but the contract said if there is termination we have to refund the fee that we received in advance proportionally. eg. number of days elapsed in one year, a 365 days per year as basis computation.
based on the nature of the contract is it monetary or non monetary?
Thank You
Hi Silvia i need your help for accounting FCY share capital injection.
Our Company X functional currency is NPR. We have received contribution from abroad shareholder against pref. share capital in USD. Our local bank has provided certificate of cash injection in NPR 102.8/USD. Exchange rate for our recording purpose is 103.26. We allot shares to our shareholders in NPR in future. Our main concern is what is the historical rate for us and appropriate accounting?
Further we have to register FDI in central bank, however the same rate will be 102.80.
Is External commercial borrowing monetary or non monetary item?
Monetary, as there’s the obligation to deliver cash.
Hi. Our company have loan agreement in USD (which is not our reporting currency). Considering the fact that contractual rate of the loan is decreasing, however for IFRS purposes we use effective interest rate, currently we have positive figure in interest payable (kind of we have paid more than we incurred). Should this amount be revalued or not? if not, which rate we should use for the interest expenses incurred at the next period for which we already paid?
Thank you in advance.
Hi Silvia, As per IAS 21, Monetary item is if it gives right to receive or obligation to pay fixed or determinable number of currency units. so consider it how deferred income can be a non monetary item as one can determine the amount of income which though does not belong to current period but belongs to future period but the amount is certain & fixed.
Hi
so for non-monetary items do we need to reaccount for the exchange rate at 30 June? even if they pay for the item in the next financial year but purchased it before 30 June?
No, for non-monetary items, you leave them as they are, in the historic rate. S.
Hi Sylvia? Thanks for the information. It really is helping.
Can you please explain to me why intangible assets are classified as non-monetary?
Hi Nelao, for the same reason as property, plant and equipment – i.e. there’s no right to receive cash. S.
Hi Silvia,
Am working with a client in Belgium whose parent company is Chile. So, EUR is accounting currency whilst USD reporting currency. The client is adopting IFRS. However, when preparing their Financials in USD, they are translating inventory and COGS at “Transaction rate”which is actually not a mandate per IFRS. When asked client says, that using this method they get more accurate forex impact in their books. What is your recommendation?
Regards,
Sree
Dear Sree,
this method is simply not under IFRS, it is contrary IAS 21. It is NOT permitted to depart from IFRS if you think that “it’s more accurate”. Unless they apply IAS 21 properly, they cannot mark their financial statements as under IFRS (or compliant with IFRS). Or, an auditor should issue a qualified opinion (I guess you were talking about translating from functional to presentation currency). S.
Hi there,
Great site! Is a sales agreement to deliver equipment in the future considered a monetary item?
Hi Wendy,
how is this sales agreement recognized in the financial statements? Do you have any assets or liabilities resulting from this agreement recognized in the balance sheet? Because, in most simple cases, there’s nothing recognized and as a result, there’s no monetary or non-monetary item. S.
Sir when we have no historical cost Bt we have opening rate average rate and closing rate… That time which rate applying on nonmonetary asset and liability???
Dear Reema, I think you should have a historical cost, because that’s the amount at which you recognized the asset or liability for the first time, isn’t it?
Thanks for this article, Mam. Would you explain what should OCI classified as? Non monetary or monetary? Should i used closing rate or average rate for remeasurement of OCI?
Thanks.
Ercik, are you asking about the revaluation to the presentation currency? In this case, I strongly recommend reading this article, it answers your question. If you are revaluing to functional currency, use historical rate, i.e. as for non-monetary item – this is said in general. S.
Mam,
Kindly explain why Provisions for employee benefits are classified as Monetary Item?
The reason is that you will have to settle the provision in cash one day, isn’t it? S.
Hi Silvia, could you please explain how to account for equity investments in a foreign currency?
As an example I have a functional currency of ZAR and bought one USD Apple share as follows:
I paid ZAR 1820 for one Apple share when the share price was USD 140 – That means the exchange rate was 13:1 on purchase date.
On month-end the USD share price is USD 145 and the ZAR exchage rate is 15:1 – For accounting purposes I have chosen to account for the share price movement in a non-distributable reserve (NDR) and take USD 5 x ZAR 13 = ZAR 65 to the NDR account.
Can I account for the actual ZAR movement from ZAR 13 to ZAR 15 in profit and loss? (ZAR 2 x USD 140 = ZAR 280 loss accounted for in profit and loss)
Given the example above, all I want to know is if the share price movement (140 to 145) needs to be accounted separately from the currency movement(13 to 15), or if it all goes to one account?
Thank you!
Dear Brad,
1 Apple share would be classified as other investment, being the financial instrument under IFRS 9 (not a subsidiary, not an associate). In general, it is a non-monetary asset. However, for most shares (equity instruments), IFRS 9 prescribes revaluing them at fair value.
Therefore, the fair value of your investment at the end of the month is 145*15=2 175 ZAR, its cost was 140*13=1 820 ZAR (assuming it was equal to its fair value at the acquisition date), so the difference of 355 ZAR is a FV change.
You should treat the foreign currency differences as a part of the fair value change.
How to recognize the fair value change?
This depends on how you classified this equity investment under IFRS 9. Is it at FVTPL? Or FVOCI? What is the purpose of holding the share?
Making long story short – if you classified at FVTPL, then book 355 ZAR in profit or loss, if you classified at FVOCI, book 355 ZAR in other comprehensive income (not “non-distributable reserve” – no such a term in IFRS). S.
Hi there. What about if the foreign investment is measured at cost and subsequently at cost.
How would we account for the foreign investment at cost at year end, in rand value?
Hi Silvia,
Thank you for the amazing article. Can you do one for temporal method vs current rate method with some examples as well?
Thank you,
Hi Silvia-i have little confusion that how a bank loan is monetary liability? suppose i got 100 dollors loan from bank on 10% interest with 1 year validity. After on year i will pay 110 dollors rather than 100 dollors, in this case in terms of unit of currency is not fix. please explain it thanks:)
Dear Armughan,
yes, it is a monetary liability, because at the end, you will need to pay cash. And, it’s OK that it’s not fixed – it’s at amortized cost, isn’t it? S.
Hi Silvia-thanks for your appreciable answer.You r best. Now you have become my best teacher, God Bless You.
My next questions is regarding ‘Going concern concept’ i have searched much more to know that why this concept have two title one is ‘assumption’ and the other one is ‘principle’and why this is concept is assumed and who assume it?
My thinking is that as a principle it must be followed then there should be no chance to assume it.who assume it he must be believe that as a principle it has been followed in preparing financial statement.
Hi Silvia – appreciate your time on the subject! My question is related to intercompany transactions. Our functional MXN entity has a long term loan payable in USD. For the revaluation, we are placing in OCI, but my question relates to capitalizing interest on a monthly basis. Would the USD interest we are capitalizing to principal be entered at the rate on day of capitalization, or does it make sense to move the net MXN amount from the prior month?
Hi, i would also like to find out something. Shareholder loans are ideally a form of equity right? Should these be considered as monetary assets/liabilities. If not should repayments have the element of Exchange gain/loss if these where issued in foreign currency?
Hi Silvia, if a UK Company has a $20m USD loan which, translated last financial year end equals £15m. If this year it translates at £17m. Is the double entry as follows:
Dr Other Comprehensive Income Reserve £2m (P&L)
Cr Bank Loan £2m
?
Hi, I hope someone could help me remind which are posible non monetary assets and liabilitys.
Are “holding for trade liabilities”, “derivative liabilities”, “non derivatives liabilities with exposition hedged by derivatives” good examples? Are they all? And what about the Assets?
Dear Silvia,
I have a query. Unbilled Revenue in Foreign Currency Monetary or Non monetray assets ?
We record sales at point of delivery .payment terms like 50% advance 30 % on delivery , 10% after 1 month of delivery, 10% after 2 month of delivery. on delivery, we book the sales account at 100 % value . Dr. Customer a/c credit :sales
later we transfer 20 % of sale value to unbilled revenue .after 1 month or 2 month we transfer amount from unbilled revenue to Customer Account( Using exchange rate on the date of Transfer). My doubt here the unbilled revenue is monetary or non-monetary ?
Dear Silvia,
For a company under IFRS that buys its inventories in foreign currency, revaluation of that goes to P&L? All purchases between related parts.
Hi Juan, I think this article can give you the answer. S.
My company is holding company. These financial statements are presented in United States Dollar (US$), which is the Company’s functional currency. As at 22 April 2016, we investment a subsidiary. The subsidiary company’s functional currency is Indonesian Rupiah (IDR).The subsidiary company incorporate on 01 January 2016.
My question is should the historical rate of share capital for subsidiary company be the rate the date of incorporation or date of investment?
Hi , i need to know that investment in shares are nonmonetary assets. Then how is it not an intangible assets as per IAS38? Please clarify me
Hi Sinu,
I don’t understand your question. Intangible assets are definitely non-monetary – it’s also shown in the table above. S.
Hi Silvia,
Excellent article, vrey useful.
Question: We are a new start with a functional currency of Euro (salaries etc. paid in Euro). However, given the complex nature of the company we have been unable to get a Euro bank account set up as of yet. We have the use of a USD intermidiary for now. We are paying Euro supplier invoices out of the USD a/c.
Should I:
(a) Post to both the bank GL and trade payable (TP) in USD and drive the FX from the TP to the P&L, or
(b) Post the Euro invoice value against both the bank GL and TP and translate the bank GL at month end closing rate, bringing the exchange difference to the P&L?
Hi Derek,
when you get the invoice, you normally book it in EUR (no USD bookings). However, the problems arise when paying the invoice from USD account. When you pay the EUR amount, then the bank automatically translates the EUR amount to USD – so use this rate for booking the payment. At the end of the reporting date, only the remaining balance on USD account is translated to EUR and the difference is brought to P/L.
Dear Silvia,
One of our client’s functional currency is USD, but presentation currency is SGD, so while translating all income , expense to present in the Financial Statements(FS) do we have to use spot rate of SGD-USD and year end rate of SGD-USD to translate monetary item’s for presenting in the FS in SGD, which makes the process sound tedious, also will this affect the forex gain/loss.please enlighten me in this regards..
Dear Jeyam,
once you have your financial statements in USD, then at the year-end, for presentation purposes, you should:
– translate all assets and liabilities with the closing rate
– translate all items of expenses and revenue with the transaction date rate (spot), but to be more practical, you can use the average rate during the period.
There will be a difference and your balance sheet will not balance, because you use different rates (year-end for assets/liabilities and average for P/L) – you show this difference at CTD (currency translation difference) in equity. S.
Thanks a lot Silvia, do you have any CPD Courses for ACCA-especially for FRS 37, FRS 11 and FRS 18
Dear Jeyam,
I have covered these areas in my IFRS Kit – and yes, it counts for CPD. S.
Hi Silvia.
We are currently auditing a Group which has Investment in an associate in foreign currency.
The Investment in Associate is a non-monetary item.
It is accounted for using the cost method for parents financials, and equity method for the consolidated financials.
My Question: For consolidation purposes, the client has revalued this investment and the corresponding revaluation gain/loss is set off against the carrying amount of investment (equity method as done for share of profit/loss in associate).
Kindly advice is the foreign currency investment in associates can be revalued at closing rate and the effect shown under the investment?
Dear Jonathan,
for consolidation purposes, you should translate investment’s financial statements to presentation currency using the closing rate for assets/liabilities and average rate for income expenses. Here, CTD – currency translation difference within equity arises. Then you apply the equity method as usual. S.
Dear Silvia
Thanks for your reply.
Could you kindly clarify what it means by “CTD – currency translation difference within equity”?
Let me rephrase my query: Investment in an Associate on 3 Jan 16 of USD 1m, recognized as GBP 789K at initial recognition by the Parent.
So at year end would the USD 1m need to be revalued/translated again at closing rate with an exchange gain/loss affecting the initial Investment of GBP 789k? along with the share of profit/loss during the year (equity method)?
Jonathan,
in parent’s separate financial statements, you do nothing, because as you wrote, it is stated at cost (= at the historical rate, as this is non-monetary asset).
In consolidated financial statements, you need to translate associate’s financial statements first. You take its balance sheet – apply closing rate to everything. You take its P/L – apply average rates to everything. If you do it right, you will find out that the balance sheet does not balance (because you used different rates for balance sheet and profit or loss). This difference is CTD.
When you have the financials of associate stated in parent’s functional currency, there you go – apply the equity method.
So no, you do NOT revalue the USD 1 m. – you do it as I’ve just described. S.
Thanks a lot Silvia.
Appreciate your help on this.
Related to the monetary vs non-monetary item, please help me this case:
At 1/1/2016:
Company A & Company B sign 2 contracts:
Contract 1: A sells machine to B, value: 200 million USD.
Contract 2: B will pay for the contract 1 by delivering 120.000 tons of Cashewnuts to A in 7 years.
The question is: In the Balance Sheet of B, is the payable 200 million USD monetary or non-monetary? And at 31/12/2016, the payable will be recognised at the closing exchange rate.
My opinion:
Based on IAS 21: “A right to receive or obligation to deliver a fixed or determinable number of units of currency is monetary item”, B’s obligation is not have to pay a number of units of currency, otherwise, B will pay a number of goods=> This payable is non-monetary items => Therefore, it will not be recognised at the closing exchange rate, but using the exchange rate at transaction date.
So, is it correct?
Dear Linh,
this is a very interesting question.
I agree it’s a non-monetary liability, but I do not agree to keep it at historical cost. In fact, you have a sale of cashews that was paid by the machine. The fact you accepted the payment for cashews (machine) 7 years before their delivery means that you have 2 things to deal with:
– you have a contract liability (look to IFRS 15.par.106), and
– there is a significant financing component involved (as delivery happens 7 years after payment).
Therefore, instead of mere keeping the liability at historical rate, you should think about discounting, recognizing interest income each year and then also – think about the fair values. I guess company B is the producer of cashews and they need to be reported at their fair value at the end of the reporting period (look to IAS 41). As the contract liability is tied with cashews, it would be appropriate to do the same. Not easy!
Thank you Silvia, I really appreciate. I will consider what you advised. Then if I have more questions, please help me!
Hi Silvia,
In relation to the calculation of PPE additions of a foreign currency subsidiary in the consolidated financial statements –
Which method should be used to calculate additions value of the FC subsidiary balance?
1) Closing consolidated balance sheet exchange rate multiplied by additions for the year in foreign currency.
Or
2) Exchange rate at time of purchase x value of addition in FC. (the difference between the closing rate and rate used to be shown as FX translation)
This is only a problem when you consolidating a foreign currency subsidiary to Group reporting currency.
PS: If method 1 is used > PPE additions may not tie to the cash flow statement.
Dear Sachin,
I know exactly what you mean and believe me, I saw more methods of doing this. However, additions are a “movement” item and therefore they should be translated at the dates of transaction (see also IAS 7,par. 25). Any differences are reported as CTD (currency translation difference). Also, this is going to tie with your statement of cash flows, believe me 🙂 S.
Dear silvier,
if the company would like to change functional currency, what will the company do on Equity part such as retained Earning, share capital and premium on share capital?
How could the company account on allowance loans loss provision? Monetary or non-monetary? if it is monetary, what is the journal entry on gain/loss from the provision?
Thanks.
Dany
Dear Dany,
when you change functional currency, then you account for the change prospectively. It means that you should re-translate ALL ITEMS (including share capital, retained earnings, etc.) by the rate at the date of change and these translated amounts will be new historical costs amounts for non-monetary items.
As for the second part of your question – loan loss provision is monetary, exactly as loans themselves. The journal entry is simply Debit P/L – Foreign exchange loss / Cr. Provision (or vice versa, if there’s a gain on the provision).
S.
Dear Silvia,
Thanks so much for your respond.
I have one more question on PPE part. The company has functional currency is KHR. The company bought car in 2014 amount 10,000 USD and exchange rate 4,000 KHR, on that day the company record the car amount 40 million KHR. After two years, the company changes functional currency from KHR to USD in the early 2016, so the fixed asset remain NBV 24 million KHR, accumulated amount 16 Million KHR exchange rate is 4,100. Thus, I wonder which amount/exchange rate should I use to convert to new functional currency?
Thanks.
Best Regards,
Dany
Dear Dany,
you should still use the rate at the date of a change. Once you booked your car in the financial statements by the historical rate of 4000, then you can forget about USD and the car is simply “KHR” non-monetary asset. When you change the functional currency, you translate the car at 4100 rate. S.
Dear Silvia,
Finally i found a forum that could answer our question. It’s a great forum.
Relating to change in functional currency, if my understanding to our reply above is correct, (1) We translate “ALL ITEMS” regardless the items are denominated in USD or KHR. We just base on all reported items in KHR as at the date of change, then translate everything from KHR to USD. This includes Share Capital and Retained Earning. Hence there will not be any Forex Reserves.
(2) How about the comparative figures? Should we follow exactly the translation in (1)?
Thank you
Dear Silvia,
when changing functional currency, do you also use the FX rate at the date of change for translating all the comparatives, or should they be translated at the earlier balance sheet date rate?
Thank you
Matt
Dear Matt,
you do NOT restate the amounts in your functional currency retrospectively. IAS 21 requires this change to be accounted for prospectively – with the amounts translated at the date of change.
Now, what you are asking is – “how shall we present our comparatives?” So in fact, you are dealing more with the presentation currency rather than functional currency for the last year.
As you know well, you can select any presentation currency for your financial statements (you don’t even need to present them in your functional currency). Thus you would simply restate previous year’s numbers in your “then-functional” currency to the presentation currency (your “new-functional” currency) in line with the IAS 21 rules (all assets+liabilities with the closing rate; P/L items with the average rate or the transaction date rate). I hope it helps! S.
Hi Silvia
If the company received an amount in foreign currency from a related company and director, do we need to re-translate the related company current account and director current at the rate with closing exchange rate at report date?
As the director c/a comprises of amount in several currencies, it seems it’s necessary to break down the balance in different parts by currencies and then re-translate. Is this correct?
Thanks.
Cody
hello silvier,
after computing the foreign gain or loss on receivable and payable s using closing rate what will be the treatment. meaning that ledger to be debited and credited
Hi Maria,
if it’s loss on payables, then Debit P/L – Foreign exchange loss (or the same expenses as the ones related to your payables) / Credit Payables. Analogically the remaining items. You get the idea. S.
Hi Silvia,
if I have investment in subsidiaries and impairment of this investment. Both are in foreign currency. Which rate should I use to translate the presentation currency? Thanks in advance.
Hi JC,
in your separate financial statements these are non-monetary items, therefore use historical rate. If you, for some reason, translate your financial statements into some presentation currency, use the closing rates. S.
Hi Silvia, I would like to know how one should treat a perpetual bond (callable) issued as Tier 1 capital in a Bank. Would this be a non-monetary because Tier 1 is considered capital? or should it be considered as a monetary item because it is similar to a bond?
Hi Justin,
this is a very interesting question. Now, let me ask you – does this bond pay some interest? If yes, then you have a compound instrument in fact: a principal = that is an equity part, and a liability = the obligation to pay interest. Under IAS 32, you should split these 2 parts and account for them separately (equity vs. liability). Once you do so, then a liability part is monetary and an equity part is non-monetary. S.
Hi Silvia,
Thanks for your response.
Yes, this instrument does pay interest, however even the interest is conditional and at the discretion of the institution issuing the bond. Additionally, non-payment of interest is not considered an event of default since it is part of the structure of the bond. I presume that with these conditions in place that even the interest portion should be considered non-monetary. Am I right?
In this case, you need to classify this instrument correctly – debt or equity? How did the bank classify it – equity, I guess? As there’s no obligation to deliver cash, then it’s correct to classify it as equity and in such a case yes, I agree, non-monetary. S.
Thanks Silvia, that clarifies.
Hi Ms. Silvia,
Currently doing some research work on the proper classification on of Deferred Tax Asset/Liability as Monetary or Non-monetary. Can you expound on this part of the standard which you said indirectly states that DTA/DTL are monetary items:
“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).”
Thanks Ms. Silvia.