What are Monetary Assets?
Monetary assets are assets that carry a fixed value in terms of currency units (e.g., dollars, euros, yen). They are stated as a fixed value in dollar terms even when macroeconomic factors, such as inflation, decrease the purchasing power of the currency.
Dissecting the Term “Monetary Assets”
Monetary assets are assets whose values do not fluctuate in dollar terms and that carry an obligation to deliver a certain amount of currency units. In short, they are static. However, their purchasing power may change upon a change in the prices of goods and services in general. A monetary asset cannot become obsolete nor gain more value (appreciate) in the market over time.
Characteristics of Monetary Assets
Two key characteristics of monetary assets include:
- Change in real terms: Monetary assets are fixed in their dollar terms but are subject to changes in real terms (i.e., a relative change in buying power). For example, a sum of $100 may only buy you two dozen apples now, compared to 3 dozen previously. This means that there has been a decline in real terms amounting to -33%, even though the dollar amount remains the same.
- Restatements in financial statements: They are not subject to a restatement of their recorded value in financial statements. In contrast, a non-monetary asset, like land, may be subject to depreciation or appreciation, depending upon market conditions.
Although, if the original figures are in units of foreign currency, the value of monetary assets must be restated according to the prevailing exchange rate on the closing date.
IAS 21 clearly states on the point:
- Monetary assets are recorded using the closing exchange rate.
- Non-monetary assets are not re-translated but kept at the historical or original rate.
Examples of Monetary Assets
- Bank deposits
- Trade receivables
- Other receivables meant for settlement through cash
- Investments in debt capital market instruments
- Lease investments
What are Non-Monetary Assets?
- Conversely speaking, non-monetary assets are those that do not have a prescribed value in exact dollar terms. The value of assets that are non-monetary change or fluctuate over time and their cash convertibility is limited. Therefore, these assets are not that liquid. Examples include property, plant & equipment, intangible assets (including goodwill), equity shares (some companies treat shares issued in foreign currency as monetary assets due to the absence of clear-cut directives), and inventories.
- A non-monetary asset, like plant & machinery, will see its value decline as the technology becomes obsolete. Its value depends upon certain factors such as changes in technology, supply-demand factors, etc. These factors are not relevant when it comes to the valuation of monetary assets.
Assets that can be either Monetary or Non-Monetary
Prepayments, or advance payments, can either be monetary or non-monetary, based on a contract with a third party (the party to which payment was made). If, as per the contract, the prepaid amount is non-refundable (which it usually is) or if there is no contract and the probability of getting the amount back is very low, then it should be treated as a non-monetary asset.
Investments in preferred shares are treated as monetary assets if there is a clause in the contract, by virtue of which, the redemption of preference shares has to be undertaken by the issuing entity after a certain time in the future, much like a debt. Otherwise, investments in preferred shares will be treated as non-monetary assets.
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