Monetary or Non-Monetary?
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 |
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 |
Finance lease liability | Monetary |
Deferred tax liability | Monetary – see below |
Bank and other loans | Monetary |
Accruals | Monetary |
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.
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Please, let me know in a comment below the article and if you know someone who can use this information, please share – thank you!
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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?
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 😀
its extremely helpful for me
Thank you so much !!!!
It is indeed the best website and useful information.
Thanks
Oneua
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
For the first time in my life i feel like i can conquer any Accounting problem. Thanks Silvia
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.
It’s encouraging to see how simple you make IFRSs for the masses. The profession needs more people like you! Keep it up.
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.
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
Accounting for financial instrument
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.
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.
Yes it does help. Thank you.
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.
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 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
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
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
This a very good site to understand the things in simple manner without making things ambiguous and making others confused.
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
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 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
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 –
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,
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
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 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
Hi Silvia,
Is deferred expense monetary or non-monetary?
Non-monetary.
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, is the obligations under finance lease and pension benefits to be paid is monetary? And why?
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 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!
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 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.
I enjoy your way of writing really enjoy this website.
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
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?
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.
Nicely explained
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.
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.
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,
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.. 🙂
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,
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! 🙂
If I credit sales/ revenue and debit trade receivables. Is sales a monetary item for foreign exchange rate purposes
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!!
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.
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.
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 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.
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 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
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,
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.
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.
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.
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,
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.
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.
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?
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.
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 ?
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?
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 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 – 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 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,
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, 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.
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.
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.
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?
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.
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
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 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. 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.
Is External commercial borrowing monetary or non monetary item?
Monetary, as there’s the obligation to deliver cash.
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.
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,
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.
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
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
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,
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
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.
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.
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?
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.
Hi Silvia, is a creditable withholding taxes a monetary or non monetary item?
Monetary.
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,
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!!
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,
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?
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!
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. Great article. D
1. Do all monetary assets qualify as financial assets and vice versa?
Interesting question and my answer is no. Just as an example – deferred tax asset is monetary and it is NOT a financial asset.
Hello Silvia,
Hope you are doing well.
My question pertains to application of conversion rate on Share Capital and other parts of equity.
Can you please specify what rate shall be used to convert the Share Capital as of Balance Sheet date. Also, can you please refer the relevant section of IFRSs to evaluate the basis.
Further, what are the basis to classify Share Capital as non-monetary item.
Regards,
Hi Kashif, I think I answered your question in the last paragraph of this article. Also, you can find some insights and thoughts here. S.
Hi Silvia. could you please advise on following question: For the fixed assets purchased in foreign currency which exchange rate I should use? Usually I capitalize asset in USD when it was delivered to warehouse (Goods receipt (GR) is created in the system) using exchange rate for the date of GR. After several month when I receive final invoice should I recalculate the value of asset according to exchange rate of posted invoice and updated the value of assets for difference?
Hi Mira, thanks for writing me! I think that this article exactly answers your question. S.
Hi Silvia,
Please clarify on the following;
A local company in Malawi receives a loan from a foreign company in USD for the purchase of goods and services from suppliers, contractors of consultants to facilitate the construction of an asset.
The loan of say $1 million is being disbursed in installments of varying amounts over a period of 5 years. After 5 years the loan will be fully disbursed and asset will be capitalized once its complete and in operation. The loan will then be repayable in the next 20 years with 2 payment per year on fixed dates and amount.
Please clarify on the following;
– Is this monetary or non-Monetary item?
-How should the loan and forex be treated during the 1st 5 years when disbursements are being received?Assuming valuation is done every reporting period should the revaluation go to revaluation loan/curreny reserve in equity or unrealised forex
-once payments commence the loan/borrowing will be split between non-current and current portion; how should the non-current portion be valued (through revaluation loan/curreny reserve in equity or unrealised forex) as for the current portion i think forex will be realized on the date of payment
Please guide
Hi Said,
very shortly – the loan is monetary, but the asset is non-monetary. Once you recognize them in your financial statements, they live their own life. So, you will retranslate the loan with the closing rate at each reporting date (forex gain/loss mostly to profit or loss, but you capitalize a part of it as borrowing cost to the cost of asset under construction – please see below) and you will keep the asset at the historical price.
Now, I can’t give you detailed answer in the comment (it would give a whole article), but for the guidance:
– Here, you can read how to capitalize the asset when the foreign currencies are involved. It is asset acquired on prepayments, but the principles are the same for the loan, too.
– Here, you can find a little piece on how to capitalize the foreign exchange differences on loan as borrowing cost to the cost of an asset.
Hi Silvia
When one is not able to find a solution on peculiar accounting issues, they have only one way to run- towards you- to have a simplified understanding.
My query is as follows- Company maintains accounts in USD. Share capital is in EUR. On the day of share capital infusion, the share capital is shown in the balance sheet in USD (because accounts must be maintained in USD) on the forex rate (EUR:USD) as applicable on the day when share capital is actually transferred to the company’s bank account. At the end of each financial year, the share capital is valued and the forex is shown in the reserve so that the net equity (shown in EUR) remains same as was infused. (QUESTION 1- is this the correct way of accounting? If not, what is the correct manner).
After few years, shareholders decided to reduce the par value from 100 to 96. So 4% share capital needs to be returned back to shareholders. As the original infusion was in EUR so the shareholder needs 4% reduction and refund in EUR only. Considering that accounts are maintained in USD so there will be a forex impact due to EUR share capital reduction. I believe this results in forex realization on the date when the share capital reduction actually took place and on the forex rate applicable on the date of reduction. If the share capital is reduced, reserves should also be reduced. (QUESTION 2- where and how this forex realization should be shown? Should it be part of Other Comprehensive Income or should it be part of Other Reserves? Can you please provide the recording entries? I believe 2 accounts which will be affected by the forex are: Forex Resevers maintained in the balance sheet showing the forex valuation of foreign currency capital and the second account will be forex realization account in Other Comprehensive Income showing the affect of realized forex on capital reduction)
Please advise.
Hi Victor,
thank you for this question. It is quite long to cover in one comment, but I’ll try to cover it in one of my podcast articles within the near future – check out here. S.
Thanks a ton Silvia
Hi Silvia! Thanks for all the information that you share with us.
G8 explanation, loving it.
Hi Silvia, I was wondering if there is any provision that allows non-monetary items to be converted at a rate other than historical rate (assuming that the company might not know what was the historical rate used in the beginning). I was not able to identify any such provisions in FRS 21. Hoping you could help! Thank you.
Hi Slivia
I have some unquoted non current investment in Prefernce share and mutual fund , how can i present in financial statement as per IFRS finanical instrument .
is investment in a mutual fund a monetary or non monetary item
Hi Ozar, it is similar as shares (equity investments) – please look to the above table 🙂
Hi Sylvia,
Thank you for your explanation. I have 2 questions
– Are investments in subsidiairies non-monetary items ?
-For consoldiation purposes, should them be converted at the closing rate or keep at the historical cost
-If I am converted the standalone accounts to IFRS, should I use the closing rate or the historical cost
I am a little bit confused with thes sentences:
” ‘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.”
Thank you for your feedback
Hi Francine,
please do not be confused with individual separate financial statements and consolidated financial statements. In individual, investment in subsidiary is an equity investment and thus it is non-monetary. In consolidated, it is different – you need to translate the financial statements of subsidiary by the closing rates as shown in this example. S.
What a quick and clear answer!Thank you so much. you are amazing!
Hi Sylvia,
Many thanks for the explanation. I have the following questions:
– For consolidation purposes, as investments in subsidiaries will be eliminated. Is it necessary to make the conversion?
-If we consider the standalone level, for a conversion from a framework to IFRS, investments in subsidiaries are non-monetary items? Then, do we need to convert to the closing rate or keep it to the historical cost?
I am a little bit confused with the following ;
t’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.
Francine,
1) Yes, you do need to make conversion for the individual financial statements if they are published. I think you are still confusing these two items (consolidated vs. individual).
2) Historical.
S.
Hi Sylvia,
Thank you for your information. I would like to ask:
There is a investment in subsidiary. Investment cost keeps as historical cost in a foreign currency at the date of the transaction.
At the year ended, because of decreasing vale of foreign currency (around 10%). 1) Should I make impairment of the investment using the closing rate? However, the subsidiary’s retained earning is positive in foreign currency .
2) or the test of impairment of the subsidiary should use the exchange rate at the date of the transaction ?
Thank you !
Nick
Hi, should we do revaluation for the provision for unutilised leave?
Hi Sylvia,
I’m a bit confused about the following part:
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 non-monetary items in foreign currency carried at historical cost – the historical exchange rate (at the date of transaction);
For all non-monetary items in foreign currency carried at fair value – use the exchange rate at the date when fair value was determined.
According to my understanding, when we first acquire a non-monetary item incurred in a foreign currency (say $) such as PPE, in order to record the transaction in the books (kept in € functional currency) the cost of the PPE would instinctively be translated at the rate ruling at the acquisition date.
Therefore it won’t be necessary to re-measure the non-monetary items at each reporting date since they are already carried at cost less accumulated depreciation.
Thus, the part of the standard that says: “For all non-monetary items in foreign currency carried at historical cost – use the historical exchange rate (at the date of transaction);” looks irrelevant to me.
Hopefully, I made my point clear.
Please advise.
Thank you in advance.
No, it is not irrelevant. I simply restates the rules of IAS 21 that you should keep non-monetary assets at historical cost. But I added a note that you should not recalculate – I hope it makes things clearer.
Oh yes Sylvia. Perfectly clear.
Thank you very much.
Dear Silvia,
If i havs prepayment for translation service (translation of document from one lenguage into other) is this monetary or non-monetary?
Dear Silvia, if i have prepayment for translation service is this monetary or non-monetary?
Hi Silvia,
Thank you for such a wonderful post. I have a clarification, I am analyzing a Singapore listed company and it occurred to me that if foreign currency non-monetary items like PPE is carried at historical cost, then there should be no foreign currency translation adjustment. But their notes to accounts says, “For consolidation purpose, the assets and liabilities of foreign operations are translated into SGD at
the rate of exchange ruling at the end of the reporting period and their profit or loss are translated at
the exchange rates prevailing at the date of the transactions. ” Does this mean that they keep translating the historical cost of a foreign currency asset in a subsidiary, and when it is consolidated these assets recorded at historical cost in the foreign currency is translated at year end rate?
Thank you
Dear Krishnaraj,
I think there is a bit of confusion. First, you have to think of WHAT YOU DO. So:
– if you prepare individual, your own financial statements in your functional currency (let’s say USD), then you do NOT revalue non-monetary items.
– if you have a parent in Singapore and you need to translate your all financial statements to presentation currency (SGD), then you revalue ALL assets with the closing rate.
You can read more about it here and here. I hope it helps. S.
It does! Thank you very much!
Hi Silvia, On the issue of foreign currency revaluation, is it advisable for a company to account for exchange gain/loss monthly.
Hello Silvia,
Non govermental organization has Grant from donor $1.000.000. Functional currency is Gel. At the end of period it has receivables $800.000, cash $200.000 and Restricted funds $1.000.000. Exchange rate changed. I have obligation to Donor to spend all amount if not I should pay back unspent amount.
Is Restricted funds monetary or non-monetary item?
Hello Silvia,
If the parent company funding the subs, the functional currency is USD, is the Intercompany AP/AR will be translated at month end rate instead of historical rate?
Will this funding to the subs considered as “loans” and treated as “equity” instead of monetary items?
Thanks,
Elly
Please see my response to your second comment.
Dear Silvia,
I have the same though as: In individual, investment in subsidiary is an equity investment and thus it is non-monetary. In consolidated, it is different – we need to translate the financial statements of subsidiary by the closing rates.
However, the Partner from our audit firm, he disagreed. He said that the “loan” is considered as equity and it should be translated as “historical rate”.
Do you have any accounting guidance that I can show to him?
Many thanks!
Elly
That’s an interesting question. However, I don’t think that the full loan can be considered as a capital contribution – please see this article. Intragroup loans must be carefully assessed upon initial recognition, then you should decide on what it is and then decide on the accounting treatment.
My question is on the day of translation. What are you calling historical exchange rate which should be used for non monetary assets? For instance, i have
day1: pruchase of PPE at USD100 when exchange rate is $1: 12ZAR.
day 2: Functional currency change to ZAR – exchange rate $1: 9ZAR
day 3: Year end : exchange rate $1: 11 ZAR
Am i going to translate PPE at $1:9 which is the rate at functional currency change or i stick to day 1 rate?
I understand at year end (day 3) i wont translate again, but the question is i should maintain the non monetary assets at which rate?
Hi Wisodm, if you change your functional currency, the rate at the date of change becomes the new “historical” rate – that would be 9 ZAR/1 USD. Please read this article to learn more about it.
Thanks Silvia for clarification
Dear Silvia, got a question, in the article the monetary/non-monetary has been emphasized only on the balance sheet, does it mean that all items in the Profit and loss is considered as monetary hence translated at closing.
sabhan
Dear Sabhan,
for the purposes of translating transactions into your functional currency it makes no sense to distinguish monetary/non-monetary for expenses and revenue, since you never translate them at closing (the different thing is translation to presentation currency, but here, no monetary/non-monetary distinction is necessary). S.
Dear Silvia,
thanks a lot for the response and reply, the article talked about foreign entity revaluation, could you please clarify where we have specific foreign vendors in the parent books( functional currency) should it be valued using closing
Hi Silvia,
Firstly thanks for a helpful website, it is amazing.
My question is about accruals. As you mentioned above “Accruals” are monetory. In my company sometimes we are posting some accruals due to the not received or not billed invoices. Example the lawyer is in a trip and forgot to bill the current months’ invoice. We are posting the monthly contract lawyer fee to accrual account and expense account. Then after the month-end closing we are getting an invoice sometimes more than sometimes less than the accrual. I think that expense was happened when the service was taken and I did my best estimate for the expense. So I believe that this accrual must be non-monetary. What do you think about this subject?
Hi Silvia
It’s great that you are of so much help to so many,
I had some questions relating to “the acquisitive “case study on the Ifrs website. Im not sure what to do about issue 3 and was wondering if you’ve posted anything relating to these case studies or if you could assist me.
This would be truly appreciated.
Hi zaa,
thanks! Well, please specify what you are talking about since I have no idea what is “the issue 3 in the acquisitive case study”. Thank you!
Hi Silvia, i am really appreciate to reply to each and every query!!, really great job you are doing.
I have an some query which i need to understand, if you could please helping out that would be really appreciated.
Query : 1
My Query is, we have an foreign vendor against which we are receiving the material in foreign currency (USD) and contract specified the rate of payment 1 USD = 70 INR, in that case at the of book closure if the USD liability exists in our books and the closing rate of month end is 1 USD = 72 INR OR 1 USD = 69 INR in that case, whether we re-instate the liability by considering the month end closing rate if reporting currency (INR) or not to re-instate.
Query: 2
We have an contract where mentioned USD liability suppose $1 Mn for whole year and the PO would be released for services by converting the rate 1 USD = 70 INR and one condition mentioned if the rate of for complete F.Y, is fluctuating +2% upward then more than +2% whatever then amount to be pay to vendor, in that case the nature of this upward would be treated a foreign exchange gain / loss or consider into the nature for which PO have released.
e.g. of Query : 2
Contractual liability for Managed Services = $1,000,000.00
FX Rate at the time of issuing of PO 1 USD = INR 70.00
PO issued in INR – 1st Apr’18 = INR 70,000,000.00
Condition mentioned if the rate going upward by 2% in complete F.Y. then in excess of 2% amount would be pay to vendor.
Closing Rate at the end of F.Y. (31st Mar’19) 1 USD = 73
Rate change is 104%
in Excess of 2% -2%
Rate Fluctuation =INR 1.60
Fresh PO to be issued of INR 1.60 INR 1,600,000.00
– What treatment would be done for extra PO issued in books either Management Services or Forex gain / loss.
– Whether we required to re-instate the value till the end of F.Y.
Regards,
Rohit Singh
Dear Rohit,
I am sorry, but these comments serve as a quick help in case of doubt, but not as a solution to similar more complex scenarios. We will be very happy to serve you within our online advisory service here.
Hi,
In the case of share capital, where the balance is still receivable from a related party at the time issue of shares. The shares issued were in a different currency.
So the balance of receivable from the related party would be translated at the SOFP date since there is a right to receive a fixed or determinable number of currency units. RIght?
Yes, right.
hi,i have two questions
1. what if a company issued new share and agreed to receive the payment in a currency different from the functional currency but the payment has been made subsequently on different times. how to treat the exchange difference.
2 what if a company issued new shares at a premium higher than the par value how do we treat the gains thank u
Hi Silvia, could you clarify if there was a typo in his statement: t”A few companies treated their foreign currency share capital as a monetary item, but they took foreign exchange differences to the statement of other comprehensive income, …”
Should the foreign currency differences be taken to equity directly instead of through OCI?
Thank you.
Yes, sure, thank you!
Hi Sylvia, thank you for this article.
Could you please clarify, are contract assets under IFRS 15 classified as monetary items, and if so, why and also, what becomes the reason for distinguishing between “conditional” – contract asset and unconditional” – trade receivables if both are monetary
Trade receivables are contract assets that became unconditional. Contract asset is normally expected to be received in fixed or determinable units of currency.
Hi Silvia, thank you for the article.
I have current situation where a branch receives cash in FX from the head office to fund its operations. The head office is insisting the amount sent to the branch even the branch has no means of paying back. Using the substance over form principle I see the amount transferred from head office as a form equity hence do not agree with revaluation proposed by the head office accounts team. can you help clarify this for me, thank you.
Thanks for the detail. it is very clear.
Hi Silvia
I have a current situation ,,,during the year 2017 the company has prepaid shareholder 1.000.000 E (pre-payment of Divident ) and in March 2018 for 500.000 Euro (prepayment of divident).In 30 june 2018 the Shareholder settled to recognise the Profit of the Year 2017 as divident distribution in Local currency 2.000.000 USD .This “‘prepayments “‘ are monetary -or non monetary items…should I revaluated them in local currency 2019.I would be very grateful If you can clarify this situation for me , Thank you in advance
Dear Sivia,
thanks for your information. could you please provide me details regarding below two questions.
1) all loans are monetary items, what about loans that are classified as doubtful and loss. can we consider them as monetary, although they are uncertainty and will be not back.
2) you mentioned in one of the above questions that loan loss reserves are monetary items. can we consider these loan loss reserve as monetary liability??
Hey Silvia – Excellent article, though I am willing to understand more on why Investment in associates is a non-monetary item when the amount is carried at NAV which indicates determinable amount receivable upon disinvestment/disposal.
Hi Silvia,
Many thnaks for your amazing website. It`s really useful,
Would you be so nice to explain how to treat for month-end valuation purposes` accrued income and accrued expenses? Are they non-monetary or monetary items?
Your swift reply will be much appreciated. Thank for help.
Hello Floydka, as I wrote above – some of them are monetary, some of them are non-monetary. But, if they relate to items that will materialize in cash later on, then they are monetary.
Thank you Silvia for your kind assistance. My understanding now is that it depends mainly on a probability of bearing these costs by a company ( whether accrued costs are calculated based on a contract or whether it is a kind of estimation) Best regards.
Is a financial guarantee a monetary item?
Yes 🙂
Hi Silvia, can I check with you how can I translate the depreciation of fixed asset and right of use assets? Is it using the average exchange rate?
In general, use historical rate as for any other items of expenses and revenues. If you are translating to presentation currency, you can use average rate as an approximation. S.
Hello Silvia.
Kindly advise on how to deal with depreciation on revalued fixed assets
Dear Silvia,
My company has an investment of 12% in a foreign based entity. Will this investment needs to be revalued at closing rate? Or leave as is at historical rate?
Dear Silvia,
In reference to the IFRS, you have mentioned that the Monetary Items should be translated at the year-end rate of the presentation currency. For example, I have Bank Accounts in functional currency i.e USD and the presentation currency is Tanzanian Shillings. At the year-end, I noticed that the Cash at Bank (USD) into Tanzanian Shillings less to the Actual Balance in USD hence I need to record gain and increase the bank balance after translation to year-end rate. Where is this gain recorded in the Profit or Loss account as other income or in Other Comprehensive Income (SFP)?
Should unrealized gain or loss reserve account revalued?
In some cases if we not revalued the account, there remains a differenc.
Dear Silvia,
Good Day!
My company did accrual revenue in functional currency and billed customer in foreign currency at later date. As such, there would be differences at exchange rate. To offset the accrual revenue caused by the exchange rate, should it be debit revenue (P/L) or debit unrealized loss?
Thank you so much for your kind advice in advance.
Hi Liz,
We live in a country with hyperinflation rates about 200% a year. So Our Functional currency is very weak.
We are four partners with 25% each in the company. Since 2016 there has been numerous partner withdrawals. At the end of the year to zero it out we face the challenge with devaluation of the currency. Any way to translate these partner withdrawals. As it has no value to Partner B compared to Partner A at time of withdrawal.
Can this be translated to be fair to all partners. This is a huge issue we are facing at the moment and finding it not fair for some partners to receive the same amount at a time with much less value.
Your advice please
Makki, n. 1 point – I am Silvia, not Liz. N. 2 point – no, it cannot be translated fair to all the partners if withdrawals happen at the different time points, sorry. If you live in hyperinflationary economy, then you are taking that risk. The only way is to agree compensations on a private basis.
Hi!!, when translating the Balance sheet item, is it reasonable to translate Liabilities using Closing Selling Rate, Assets using Closing Buying Rates? please help me with this
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Hello,
Please I am an auditor and I realised that my client always revalue its investment in shares (equity investment) using the exchange rate because the shares were issued in a foreign currency.
Please the gain is added to other income and treated in the profit or loss.
Please is it right