Monetary items are units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.
Another (more clear definition, I hope) is as follows:
Monetary items in the closing statement of financial position are defined as money held and items to be received or paid in money.
For translation of the amounts in foreign currency to the reporting entity’s functional currency, the standard IAS 21 states that the entity re-calculates all items after initial recognition using exchange rate based on characteristics of the specific item.
- For all monetary items in foreign currency – use closing exchange rate at the reporting date. Foreign exchange gains and losses are recognised in profit or loss. Changes in the fair value of available-for-sale financial assets are recognised in other comprehensive income (OCI), except for foreign exchange gains and losses on available-for-sale monetary items and impairment losses, which are recognised in profit or loss. On derecognition, any gains or losses accumulated in OCI are reclassified to profit or loss.
For monetary items denominated in a foreign currency and measured at amortised cost – e.g. held-to-maturity debt securities – interest is accrued using the effective interest method in the foreign currency, and translated using the average exchange rate. Gains and losses on remeasuring the investment into the functional currency are recognised in profit or loss;
- For all non-monetary items in foreign currency carried at historical cost – use the historical exchange rate (at the date of transaction – thus, the non-monetary asset at historical cost and rate is not recalculated);
- 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 resulting exchange differences are recognised in profit or loss or OCI depending on the nature of the item. [IAS 21 23, IAS 21 28, IAS 21 30]
The reasoning behind this distinction is:
- monetary items could have all been received and paid at the closing rate at the reporting date against the prevailing closing exchange rate;
- non-monetary foreign currency amounts valued at historical cost – these are not intended to be received or paid at the reporting date but are used in the functional currency ‘production/service environment’ (property, plant and equipment) or repaid through cash flows earned in the functional currency ‘production/service environment’. Translation against the historical rate shows the best representation of the (historic) purchasing power of the non-monetary items in foreign currency;
- non-monetary foreign currency amounts valued at fair value – these are also not intended to be received or paid at the reporting date but are used in the functional currency ‘production/service environment’ (property, plant and equipment) or repaid through cash flows earned in the functional currency ‘production/service environment’.However, in the fair value measurement any change in purchasing power is already included in the fair value revaluation at a certain date and translation against the exchange rate at revaluation date of the fair value aligns the value in functional currency to the translation of non-monetary items at historical costs/historical rates.
|Monetary items||Non-monetary items|
|Trade receivables||Property, plant and equipment|
|Pensions to be paid in cash||Some prepayments|
|Investments in debt securities||Intangible assets and goodwill|
|Other receivables settled in cash||Investments in associates|
|Current tax receivable or payable||Biological assets|
|Notes payable||Share capital|
|Sales tax payable / VAT payable||Other components of equity|
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.
The central question here is whether there is a right/obligation to deliver a fixed or determinable amount of (foreign currency or functional currency) cash. Is a prepayment (advance paid) refundable in cash under which conditions?
In most cases this is not the case, advances paid for fixed assets, inventory items or annual (service or insurance) fees are either rarely refundable based on contractual obligations or common understanding or even if they are the probability of such a refund is very low.
On the other hand in the rare case an advance paid is refunded (and therefore a monetary item) this will be clear from the case at hand. So the conclusion is that most advances paid and received are non-monetary items.
Currently, this is a little bit unclear in the standards.
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 (IAS 12 78).
Investments in preference shares are another item that requires careful judgment.
More specifically, you should assess the rights attaching to the shares. In fact, IFRS 9 says 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.
Some companies issue their share capital in a foreign currency.
However, neither IAS 21, nor IFRS 9 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.
Foreign exchange gains and losses on monetary items are generally recognised in profit or loss. As exceptions, exchange gains and losses related to the following are recognised in OCI:
- monetary items that in substance form part of the net investment in a foreign operation;
- hedging instruments in a qualifying cash flow hedge; and
- hedging instruments in a qualifying hedge of a net investment in a foreign operation. [IAS 21 28, IAS 21 32]
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