## **Learning Outcomes**

By the end of this article, you will be able to distinguish between monetary and non-monetary items for foreign currency translation under IAS 21. You will understand how these categories affect initial measurement, subsequent retranslation at reporting dates, and the recognition of exchange differences in profit or loss. This knowledge is essential for correctly preparing and analysing financial statements that include foreign currency transactions.

## **ACCA Strategic Business Reporting (SBR) Syllabus**

For ACCA Strategic Business Reporting (SBR), you are required to understand how foreign currency amounts and transactions are translated into an entity’s functional currency and their presentation in the financial statements. Key areas covered in this article include:

- The definition and differentiation of monetary and non-monetary items under IAS 21
- The appropriate translation methods for monetary and non-monetary items at transaction and reporting dates
- Recognition and presentation of exchange differences in profit or loss and other comprehensive income
- Practical application of IAS 21 principles to typical SBR exam scenarios

## **Test Your Knowledge**

_Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision._

1. Which type of asset should be retranslated at the closing rate at the reporting date under IAS 21?  
   a) Inventory measured at cost  
   b) Overseas trade receivables  
   c) Land held at historical cost  
   d) Intangible assets measured at cost
2. A UK entity with GBP functional currency purchased equipment in USD. The asset is measured at cost. At year end the exchange rate has moved. What is the appropriate carrying amount in the UK entity’s books?
3. True or false? Exchange differences on non-monetary items measured at fair value are recognised in the same component as the related fair value gain or loss.
4. Briefly explain the translation treatment for an advance from a parent company to a subsidiary that is repayable on demand.

## **Introduction**

Foreign currency transactions are common in international business. IAS 21 The Effects of Changes in Foreign Exchange Rates provides the rules for translating foreign currency transactions and balances into the functional currency of an entity. A core distinction set by IAS 21 is between **monetary** and **non-monetary** items. This classification is critical, as it determines how foreign currency amounts are translated at initial recognition, at the reporting date, and how resulting exchange differences are recognised in the financial statements.

## Monetary vs Non-monetary Items: The Key Difference

Foreign currency items must be classified as either **monetary** or **non-monetary**. Correct classification is essential for applying the appropriate translation and retranslation rules.

> **Key Term: Monetary item**  
> A unit of currency held, or an asset or liability to be received or paid in a fixed or determinable number of currency units (e.g., cash, receivables, payables, loans).
>
> **Key Term: Non-monetary item**  
> An asset or liability that does not entitle the entity to receive (or require it to deliver) a fixed or determinable number of currency units (e.g., inventory, property, plant and equipment, intangible assets).

### Classification Examples

- **Typical monetary items:** cash, trade receivables/payables, loans, dividends receivable/payable, provisions to be settled in cash.
- **Typical non-monetary items:** property, plant and equipment, inventory, investments in equity, intangible assets, prepayments, accrued income not to be settled in cash, deferred tax.

## Initial Recognition of Foreign Currency Transactions

On the date a transaction occurs in a foreign currency, it should be recorded in the functional currency using the spot exchange rate:

- Monetary and non-monetary items: translate using the spot rate at the transaction date.

For convenience, an average rate may be used for transactions occurring evenly throughout the period, provided rates do not fluctuate significantly.

## Subsequent Measurement: The Reporting Date Rules

At each reporting period, items must be reviewed for retranslation needs based on their classification:

- **Monetary items:** Remeasured at the closing rate (the exchange rate at the reporting date). Exchange differences are recognised in profit or loss.
- **Non-monetary items measured at historical cost:** No retranslation; retain the amount translated at the transaction date.
- **Non-monetary items measured at fair value:** Use exchange rate at the date the fair value was determined. Recognise exchange component in the same place as the fair value gain or loss (e.g., OCI for revalued land).

> **Key Term: Closing rate**  
> The spot exchange rate at the end of the reporting period.

### Where to Recognise Exchange Differences

- **Monetary items:**
  - Revaluation of the foreign currency amount at the closing rate will result in exchange gains or losses, which are recognised in profit or loss.
- **Non-monetary items at historical cost:**
  - No exchange difference arises after initial recognition.
- **Non-monetary items at fair value:**
  - Exchange differences are included with the related gain or loss—for example, in other comprehensive income if required by the applicable standard.

### **Worked Example 1.1**

**A UK plc’s functional currency is GBP. On 1 August, it buys inventory for \$24,000, paying cash immediately. At that date: \$1 = £0.80. At the year end (31 Dec), the inventory remains unsold. The exchange rate is now \$1 = £0.75. What is the carrying amount of the inventory in pounds? Is any exchange difference recognised?**

> **Answer:** Inventory is a non-monetary item measured at cost. On 1 August, the cost is £19,200 (\$24,000 × £0.80). No retranslation is made at the year end; carrying amount remains £19,200. No exchange difference is recognised.

### **Worked Example 1.2**

**On 15 February, a company sells goods for €10,000 on 60-day credit. Spot rate at that date: €1 = £0.85. At year end (31 March), the receivable is unpaid. Closing rate: €1 = £0.88. How is the trade receivable measured at 31 March, and how is the exchange difference treated?**

> **Answer:** The trade receivable (monetary item) is initially recognised at £8,500 (€10,000 × 0.85). At 31 March, it is retranslated at the closing rate: £8,800 (€10,000 × 0.88). The £300 exchange gain (£8,800 – £8,500) is recognised in profit or loss.

### **Worked Example 1.3**

**An entity holds quoted equity shares in a foreign company (accounted at fair value through OCI). Cost: ¥2,000,000 on 1 July, when ¥100 = £1. At 31 Dec, fair value is ¥2,400,000; closing rate is ¥120 = £1. How is this asset shown and where is the exchange difference recognised?**

> **Answer:** At 31 December, translate the fair value using the rate on that date: ¥2,400,000 ÷ 120 = £20,000. The gain and all exchange differences since recognition are recognised in OCI, matching the standard for the asset (i.e., OCI).

## Special Cases and Practical Considerations

### Advances and Prepayments

Advance payments and receipts (such as deposits, prepaid rent) are non-monetary because they will not be repaid in cash or another currency amount. They are translated at the spot rate on the payment/receipt date and not retranslated.

### Provisions and Deferred Tax

Provisions are generally monetary if settled in cash, but may be non-monetary if settled otherwise (e.g., by delivering goods).

Deferred tax is typically classified as non-monetary and is not remeasured at the closing rate.

### **Exam Warning**

> Exchange differences should not be recognised on non-monetary items carried at historical cost. The most frequent exam errors are translating such assets at the closing rate or failing to match exchange differences with the proper financial statement component.

## **Summary**

| Item Type                      | Measurement Basis | Translation at Reporting Date      | Exchange Difference Location |
| ------------------------------ | ----------------- | ---------------------------------- | ---------------------------- |
| Monetary items                 | Any               | Closing rate                       | Profit or loss               |
| Non-monetary (historical cost) | Cost              | No retranslation                   | None                         |
| Non-monetary (fair value)      | Fair value        | Rate at date fair value determined | Same as related gain/loss    |

## **Key Point Checklist**

_This article has covered the following key knowledge points:_

- Define and differentiate monetary and non-monetary items under IAS 21
- Describe the proper translation method for each item type at both transaction and reporting dates
- Recognise where exchange differences should be presented in the financial statements
- Apply these rules in typical foreign currency scenarios seen in the ACCA SBR exam

## **Key Terms and Concepts**

- Monetary item
- Non-monetary item
- Closing rate

Foreign currency translation (ias 21) - Monetary vs non-monetary items