What are Monetary Assets?

What are Monetary Assets?

A monetary asset is an asset whose value is stated in or convertible into a fixed amount of cash. Thus, $50,000 of cash now will still be considered $50,000 of cash one year from now. Examples of monetary assets are cash, investments, accounts receivable, and notes receivable.

The term can be more tightly defined to exclude any assets that cannot be readily converted into cash (such as long-term investments or notes receivable). All monetary assets are considered to be current assets, and are reported as such on a company’s balance sheet.

In an inflationary environment, monetary assets will decline in value, unless they are invested in interest-bearing or appreciating assets that provide returns matching or exceeding the rate of inflation.

Longer-term assets such as fixed assets are not considered to be monetary assets, since their values decline over time.

Characteristics of Monetary Assets

Two key characteristics of monetary assets include:

  • Change in real terms: Monetary assets are fixed in their dollar terms but are subject to changes in real terms (i.e., a relative change in buying power). For example, a sum of $100 may only buy you two dozen apples now, compared to 3 dozen previously. This means that there has been a decline in real terms amounting to -33%, even though the dollar amount remains the same.
  • Restatements in financial statements: They are not subject to a restatement of their recorded value in financial statements. In contrast, a non-monetary asset, like land, may be subject to depreciation or appreciation, depending upon market conditions.

Although, if the original figures are in units of foreign currency, the value of monetary assets must be restated according to the prevailing exchange rate on the closing date.

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IAS 21 clearly states on the point:

Monetary assets are recorded using the closing exchange rate.

Non-monetary assets are not re-translated but kept at the historical or original rate.

Features of  Monetary Assets

Fixed in Value but may Result in Decline in Real Value

This value is fixed in terms of money; for example, if a company has $20,000 in cash, the value after one year also remains the same, i.e., $20,000 only, but the effect of inflation affects it like the thing which was $20,000 last year might be higher than $20,000 in the current year. Hence the change in value in real terms is possible in the case of monetary assets.

Re-Statement in Financial Statements

These are in the form of cash equivalents that are to be valued at the current market value at every balance sheet date, for example, foreign receivables, short-term investments, and foreign currency held as cash in hand. All these assets are to be valued at real value, and other monetary assets have fixed value.

Other Features

  • Easily Liquidate
  • Can be used and converted into cash at the time of need
  • A ready market for sale is available
  • Not subject to depreciation
  • It can be used for
  • working capital

Why Are Monetary Assets Important?

The monetary assets of any business entity are the measure of its liquidity. If we divide the monetary assets by the current liabilities, our ratio is termed a quick ratio. The quick ratio is the most accurate measure of an entity’s liquidity.

The higher the ratio, the better the company’s liquidity position. It means a company is in a good position to pay its short-term loans. In other words, the short-term liabilities of the company are backed up by the current assets.

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Examples of Monetary Assets

  • Investments in debt securities
  • Net investments in the lease
  • Deferred tax asset
  • Trade receivables
  • Cash is the mode of settling Other receivables
  • Deposits and bank accounts
  • Cash

Conclusion

To conclude, we can say that monetary assets are critical to the company’s overall liquidity. Holding too many monetary assets can be equally hazardous for the entity’s profitability as holding too few monetary assets.

In the case of excessive monetary assets, the company is trading off many investing activities to bring in big amounts of profit for an entity.