Monetary item
Definition
Units of currency held, and assets and liabilities to be received or paid in a fixed or determinable number of units of currency, such as cash, receivables and loans.
Why does it matter in a group?
Whether an item is monetary decides how it is translated. A monetary item held in a foreign currency is retranslated at the closing rate each month, and the difference goes to profit or loss.1 A non-monetary item, such as stock, property or a prepaid expense, is not retranslated. It stays at the rate on the day it was recorded. In a group, this is why a foreign currency loanIntercompany loanA loan between two companies in the same group. The interest is eliminated in consolidation, and exchange differences are treated according to whether repayment is planned.Open the glossary entry creates an exchange difference and a building does not.
A small example
Zenvara has a receivable of AED 400,000 from Palmridge. It was recorded at 0.2010, which is GBP 80,400. At the closing rate of 0.2040 it is GBP 81,600. The exchange gain of GBP 1,200 goes to profit or loss.
Sources
- IAS 21 The Effects of Changes in Foreign Exchange Rates, paragraphs 23 and 28.