Monetary assets vs non-monetary assets

Every business owns different types of assets. Assets are essentially resources of the business that help the business generate monetary value or that can be converted into monetary value. To gauge its true financial health, the entity must know the value of its assets.

This article looks at meaning of and differences between two different types of assets based on their valuation and liquidity – monetary assets and non-monetary assets.

Definitions and explanations

Monetary assets:

Monetary assets are assets which have a pre-determined cash value i.e., a fixed and constant amount that can be received when they are liquidated. These assets are also fairly easy to liquidate.

Examples of monetary assets include:

  • Cash balance
  • Bank balance
  • Fixed deposits
  • Accounts receivable
  • Notes receivable

The value of monetary assets is fixed in absolute terms but can vary in relative terms. For example $10,000 cash can purchase say 100 units of raw material for the company today, this $10,000 will remain $10,000 even after a few years but may be able to purchase fewer units say 90 units of raw material after few years. The relative value of monetary assets can thus change as the time value of money changes.

Non-monetary assets:

Non-monetary assets are assets whose cash value is not pre-determined at a fixed amount and can change significantly over time. These assets are also tougher to liquidate.

Examples of non-monetary assets include:

  • Market investments
  • Manufacturing fixed assets such as plant and machinery
  • Property

The value of non-monetary assets is not only impacted by the change in time value of money but also by several other market related factors. For example –

  • value of investments in equity shares changes with every change in the stock market prices;
  • value of plant and machinery can significantly decline due to obsolescence with introduction of new and improved technologies;
  • value of property changes in response to several factors such as demand and supply in the market, government regulations etc

Difference between monetary and non-monetary assets:

The difference between monetary assets and non-monetary assets has been detailed below:

1. Meaning

  • Monetary assets are assets having a specific cash value that will most likely be received when liquidated.
  • Non-monetary assets are assets for whom specific cash value that can be received is not fixed and can keep changing over time.

2. Ease of liquidity

  • Monetary assets can be fairly easily liquidated and converted to cash.
  • Non-monetary assets are relatively illiquid i.e.: they cannot be converted into cash very easily or quickly.

3. Factors that impact cash value

  • The cash value of monetary assets remains fixed and constant. Their value remains the same in absolute terms and may change only in relative terms with a change in time value of money.
  • The cash value of non-monetary assets are not fixed and change in response to several market factors such as demand and supply factors, technological factors, government regulations etc.

4. Relevance

  • Monetary assets are liquid assets and are generally used to fund working capital requirements arising out of day to day operations. For e.g., cash and bank balances and amounts received from debtors are used to pay operational creditors.
  • Non-monetary assets are fairly illiquid and thus constitute fixed capital assets that are generally utilized for generating revenue for the business. For e.g.: plant and machinery is used in production process, property generates rental income etc.

5. Reporting of foreign currency assets

  • Foreign currency monetary assets are reported at closing exchange rate that is prevalent on the balance sheet date.
  • Foreign currency non-monetary assets continue to be reported at their historical/transaction cost even on the balance sheet date.

6. Tax implications

  • Disposal of monetary assets are generally at book value and hence may not have any additional tax implication. Any disposal at higher or lower value is generally taxed as business profit or loss. For e.g.: if debtors are settled at less than book value, the difference is accounted for as bad debts which is tax deductible from business profit.
  • Disposal of non-monetary assets may result in gain or loss. These are generally taxed as capital gains or losses. For e.g.: gain on property sold at a higher price after 5 years is taxed as long term capital gain.

7. Examples

  • Monetary assets include cash and bank balance, deposits and accounts receivable.
  • Non-monetary assets include plant and machinery, market linked investments, property etc.

Monetary assets vs non-monetary assets – tabular comparison

A tabular comparison of monetary and non-monetary assets is given below:

Monetary assets vs Non-monetary assets
Meaning
Assets that have known and constant cash value which can be received when they are liquidated Assets whose cash value is not known and constant and can keep fluctuating
Ease of liquidity
Relatively easier Relatively tougher
Factors that impact cash value
Only impacted in relative terms with change in time value of money Several market factors
Relevance
Generally to funding day to day operations of a business Generally to generate future revenue for a business
Reporting of foreign currency assets
At closing exchange rate on date of balance sheet At historical or transactional cost, even on balance sheet date
Tax implications
Disposal, if results in gain or loss, will generally result in tax on business profits Disposal, if results in gain or loss, results in tax on capital gain/loss
Examples
Cash and bank balances, debtors Fixed production assets, property, market linked investments

Conclusion – monetary assets vs non-monetary assets:

The determinant factor for classification of assets into monetary and non-monetary is how their value is determined. Assets that have a constant monetary value are classified as monetary assets whereas assets whose monetary value is determined by market forces qualify as non-monetary assets. This classification is especially relevant in case of foreign currency denominated assets wherein the applicable translation rules for monetary and non-monetary assets differ.

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