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? 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 cynthia of day trade forex the closing rate.
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. 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. What is monetary and what is non-monetary? 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. 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. 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. 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. 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 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. Is there any item you would like me to explain further? Please leave me comment right below article.