When we talk about monetary and non-monetary assets, what are we saying? It is important to note that this has nothing to do with the payment or receipt of cash consideration. Of course you must have dispensed cash to acquire your PPE or inventory.

Non-monetary assets are assets whose value frequently changes in response to changes in economic and market factors and conditions. They are assets that reflect the level of inflation and price changes within an economy. Examples are items of property, plant and equipment, Inventory and Intangible assets. For example, the higher the inflation rate in an economy the higher the value of land. That is why we say that land is a store of value. Inventory also mimicks the level of inflation. For example, if you have goods in store and the market value has doubled, although IAS 2 requires us to measure inventory at the lower of cost and net realisable value in the balance sheet, we would realise the goods at a the current market price that reflects the prevailing inflation rate. In the period of inflation, non-monetary assets are compensated for loss of purchasing power.

On the other hand, monetary assets are assets that are held in a fixed and determinable unit of currency. such as receivable, payable, bank balances, and to some extent investment. These are are assets that by nature do not change in response to economic or market variables. For example, if I provided you a service of $1 million six months ago with a six month credit period and at the time I provided the service inflation rate was 10% but now, when you want to pay me, inflation rate is 21%, how much should I collect from my you? I will definitely collect the same $1 million because my receivable is a monetary item which suffer loss of purchasing power. As at the time I am collecting the money from you I have lost value because the $1 million I am receiving is not the same as the $1 million six months ago when I provided the service. Hence, in the period of inflation, holders of monetary assets lose value while holder of monetary liability gain value. This is the difference between monetary and non-monetary assets.

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