Monetary Asset

A monetary asset is an asset whose amount is fixed in terms of units of currency by contract or otherwise, and the asset-side examples given with that definition are cash and short- or long-term accounts and notes receivable in cash (APB Opinion No. 29, paragraph 3(a)). The number of currency units is fixed, so a change in the general price level does not change that number. What it changes is what those units will buy.

The Financial Accounting Standards Board (FASB) renders the same idea a second way, from the holder’s side. A monetary asset is money or a claim to receive a sum of money the amount of which is fixed or determinable without reference to future prices of specific goods or services (FASB Statement No. 89, paragraph 44).

Nonmonetary Is Everything Left Over

Nonmonetary assets and liabilities are assets and liabilities other than monetary ones, and the named examples are inventories, investments in common stocks, property, plant and equipment, and liabilities for rent collected in advance (APB Opinion No. 29, paragraph 3(b)). Cash on hand, demand bank deposits, time deposits, and accounts and notes receivable sit on the monetary side of the FASB classification table (FASB Statement No. 89, paragraphs 96 through 108). Whether a short balance is close enough to cash to be reported alongside it turns on original maturity instead, at cash equivalents.

That table sits inside guidance FASB made optional, because Statement No. 89 superseded Statement No. 33 and made the supplementary disclosure of current cost and constant purchasing power information voluntary (FASB Statement No. 89, Summary). It also illustrates the application of the definitions to common cases under typical circumstances rather than settling every case, and in other circumstances the classification is resolved by reference to the definitions themselves (FASB Statement No. 89, paragraph 96).

Two rows of that table are where the classification usually goes wrong. Common stocks not accounted for on the equity method are nonmonetary, because common stocks represent residual interests in the underlying net assets and earnings of the issuer (FASB Statement No. 89, paragraphs 96 through 108). Prepayments fall on both sides, since claims to future services are nonmonetary while prepayments that are deposits, advance payments, or receivables are monetary, being a fixed-money offset rather than a given quantity of future services (FASB Statement No. 89, paragraphs 96 through 108). Whether the asset has physical substance is a different test, at tangible assets.

Foreign Currency Transactions and Remeasurement

Foreign currency transactions are transactions denominated in a currency other than the entity’s functional currency, and a change in exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement. That increase or decrease is a foreign currency transaction gain or loss that generally is included in determining net income for the period in which the exchange rate changes (FASB Statement No. 52, paragraph 15).

At the date the transaction is recognized, each asset, liability, revenue, expense, gain, or loss arising from it is measured and recorded in the functional currency of the recording entity by use of the exchange rate in effect at that date. At each balance sheet date, recorded balances that are denominated in a currency other than the functional currency of the recording entity are adjusted to reflect the current exchange rate (FASB Statement No. 52, paragraph 16).

Remeasurement is the separate case. Where an entity’s books of record are not maintained in its functional currency, remeasurement into the functional currency is required, it comes before translation into the reporting currency, and the process is intended to produce the same result as if the books of record had been maintained in the functional currency (FASB Statement No. 52, paragraph 10).

That remeasurement uses historical exchange rates for a listed set of nonmonetary accounts, among them inventories and marketable securities carried at cost, prepaid expenses, property, plant, and equipment, and goodwill, while the current rate is used for all others (FASB Statement No. 52, paragraphs 47 and 48). Exchange gains and losses from remeasuring monetary assets and liabilities that are not denominated in the functional currency are recognized currently in income (FASB Statement No. 52, paragraph 47). That guidance sits in Appendix B, and it applies only to those instances in which the books of record are not maintained in the functional currency (FASB Statement No. 52, Appendix B).

In the Codification, foreign currency guidance is gathered under Topic 830, Foreign Currency Matters, and its subtopics are numbered beneath it, such as 830-230 for the statement of cash flows (FASB Accounting Standards Update 2016-18, Subtopic 830-230). How a reference of that shape reads is at ASC accounting.

A Worked Example

Say a client invoices a customer in euros, the dollar is the functional currency, and the invoice is still open at the year end. How that balance is carried to the current rate at each balance sheet date, and where the resulting gain or loss lands, is worked out at revaluation. A euro invoice is a claim to a fixed number of euros, so at the year end it is still a recorded balance denominated in a currency other than the dollar, and on stated inputs it falls out like this.

Invoice denominated in euros                  50,000 EUR
Rate at the transaction date                   1.08 USD per EUR
Receivable recorded on the transaction date   54,000 USD
Rate at the balance sheet date                 1.12 USD per EUR
Receivable adjusted to the current rate       56,000 USD
Foreign currency transaction gain              2,000 USD

A machine the same client bought in euros that month gets none of that. It was measured once, in dollars, at the exchange rate in effect on the transaction date, and it is not a recorded balance denominated in a currency other than the functional currency, so no balance sheet date adjustment reaches it (FASB Statement No. 52, paragraph 16).

Purchasing Power and the Changing Prices Subtopic

The other place the split decides something is the Codification’s Changing Prices subtopic, 255-10, which carries guidance originally included in FASB Statement No. 89, Financial Reporting and Changing Prices (FASB Accounting Standards Update 2015-10, Subtopic 255-10). The purchasing power gain or loss on net monetary items is the net gain or loss determined by restating in units of constant purchasing power the opening and closing balances of, and transactions in, monetary assets and monetary liabilities (FASB Statement No. 89, paragraph 40). Nonmonetary items generate nothing of the kind, since their economic significance depends heavily on the value of specific goods and services rather than on the general purchasing power of money (FASB Statement No. 89, paragraph 41).

What a Monetary Asset Is Not

An equity stake is a financial asset and a nonmonetary one, so common stock clears the financial assets definition and still lands on the nonmonetary side, as a residual interest rather than a claim to a stated sum (FASB Statement No. 89, paragraphs 96 through 108). A five-year note receivable fixed in dollars is monetary (APB Opinion No. 29, paragraph 3(a)) and noncurrent at the same time, because current assets cuts on the operating cycle rather than on how the amount is denominated.

Common Questions

Accountably places trained offshore accountants and tax preparers inside US CPA and EA firms, and a firm can hand over a block of its own classification work through a trial task and grade the result before anything else follows.