Advanced Financial Accounting Report: Monetary vs. Non-Monetary Items

This report provides an overview of advanced financial accounting, focusing on foreign currency transactions, and the differences between monetary and non-monetary items. It explains the accounting treatment for foreign currency monetary items, including the use of the closing rate as per AASB 121, and discusses how the accounting treatment of qualifying monetary items differs from other foreign currency monetary items. The report also explores why gains recognized on the sale of assets can be reversed in a consolidation context. The report references several books and journals, along with the AASB 121 standard, to support its explanations and analysis of these key financial accounting concepts.

Advanced Financial
Accounting

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Different between monetary and non monetary items............................................................1
2. Accounting treatment when reporting entity is having foreign currency monetary items......3
3. How accounting treatment of qualifying monetary items differs from other foreign currency
monetary items............................................................................................................................3
Explanation of why gains recognised on sale of assets get reversed..........................................3
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5

INTRODUCTION
Advanced financial accounting includes consolidation, partnership and foreign currency
transactions. In consolidation a big company acquire a small company and create a new entity.
The consolidated financial statements shows combined liabilities, assets, revenues, expenses and
equities of the group. In partnership two or more persons combine their business to increase the
efficiency of executing operations. In foreign currency transactions describes operational
activities of an organisation that are performed to earn a currency which is totally different from
the functional currency of the business (Arnold, 2012).
This project reports is mainly based on AASB 121's effect on foreign exchange rates and
also covers difference between monetary and non monetary items with examples, accounting
treatment of foreign currency monetary items and explanation of variation in the reporting
system of qualifying monetary system and other foreign currency monetary items are also
discussed under this project report.
MAIN BODY
1. Different between monetary and non monetary items
Monetary item: An asset or liability which is having value in money form and will not
change in future is called a monetary item. It has a fixed exchange value which is not going to
be affected by inflation or deflation in economy of the country. The company can face loss when
it is holding a monetary item when market price is rising because real value of currency will fall
in this situation. In the same situation holding a monetary liability will result in profits as the
company has to pay lower amount than real value of the currency in future (Bhattacharyya,
2012).
Example: It includes cash, account payable and receivables, marketable securities, sales
taxes and notes payable and other owed debts of an organisation.
Non monetary items: It refers to those items whose value in money may change in
future. The assets and liabilities that are shown in balance sheet and are not in cash are
considered as non monetary items. The value of such items may change with time or fluctuate
and changed over a time period. In other words, it can be defined as the asset or liability who
does not have any fixed monetary value and depends upon the economic condition of a country.
It cannot be converted in to cash and cash equivalents easily (Cuckston, 2013).
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Example: It includes stock, property, raw materials, plant and equipment, warranties
payable, deferred income tax credits etc.
Difference between monetary and non monetary items:
Monetary items Non monetary items
These items can be converted in to fixed
amount easily and it can fulfil the short term
requirement of money.
These items cannot be converted in to cash
easily when there is an immediate requirement
of money.
Liquidity level of such items is high as it
includes all the current assets and liabilities of
a business.
Non monetary items are illiquid in nature
hence, no liquidity level can be applied here
because it includes all tangible assets and
liabilities.
Value of monetary items is fixed and economic
condition can not affect the value.
Value of non monetary items is not fixed and it
is changeable according to the economic
conditions of the country.
It includes cash, account receivable and
payables etc.
It includes property, patents, warranties
payable etc.
According to AASB different types of monetary and non monetary items:
Monetary items: In AASB it has been defined that pension and other employee benefits should
be paid in cash by the employer. Provisions that are going to be settled in cash, different cash
dividends that are a part of a liability are defined example in AASB 121 of monetary items.
Non monetary items: In AASB 121 different examples of non monetary items are defined such
as prepaid amount for goods and services, goodwill, stocks owned by an organisation, various
provisions that are going to be settles by the delivery of non monetary assets, plant and
equipment etc.
2. Accounting treatment when reporting entity is having foreign currency monetary items
Foreign currency monetary items: It is a corporate finance concept which is related to
the assets and liabilities of an organisation that are evaluated in the foreign currency. Its value
can be easily measured in cash. Theses items carry exchange rate risk because continuous
fluctuation in currency market affect the value of such items.
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According to the AASB 121 the foreign currency monetary items shall be translated
using closing rate when they are recorded on the reporting date. Such type of transactions should
be recorded, on initial recognition of the functional currency (AASB 121, 2012). Closing rate is a
rate which is used by different companies to evaluate the value of assets and liabilities on the
closing date of the business or reporting date. It is also called exchange rate for tow different
currencies at the end of the financial year. It is explained by the AASB 121 that all the foreign
exchange monetary items are going to be reported in financial statement on closing rate. It is also
defined that the date of foreign currency transaction is the date of qualifying for recognition in
accordance with Australian Accounting standards.
3. How accounting treatment of qualifying monetary items differs from other foreign currency
monetary items
According to AASB 121 there are different recording systems for qualifying monetary
items ad other foreign currency items. Companies have to follow different accounting treatment
system for both the items. According to Australian Accounting standard board all the foreign
currency items shall be translated or recorded by using closing rate. Companies are directed to
apply spot exchange rate on foreign and functional currency at the date of transaction (Porter and
Norton, 2012).
Monetary items are recorded according to Australian accounting standards and
corporation act 2001 but all the foreign currency monetary items are treated according to the
rules that are defined in AASB 121. The major treatment of foreign currency monetary items is,
firstly convert the items in functional currency and than evaluate the same on closing or current
rate which is required to apply on such type of items (Oulasvirta, 2014).
Explanation of why gains recognised on sale of assets get reversed
Sale of asset is an internal source for a company to raise funds. When there is
consolidation among companies than in this situation the gains get reversed or reduced, because
the gain is used to recover the old losses that are faced by any of the company from consolidated
companies. All the gains form sales of asset are adjusted to the losses. It can only be reversed in
the situation of sales of asset because this income is used by the companies to overcome from
losses or to raise funds to run operations. It will not be reversed in the situation of loss
recognised for goodwill (Van Deventer, Imai and Mesler, 2013).
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There are various different adjustments that are made in consolidation group in relation to
sale of assets. The parent company has the right to sale the assets of the group and has the right
to get more part of the gains. The gain are firstly used to adjust losses of parent company and
than used to adjust losses of other subsidiaries. Parent company controls all the operations of
whole group and all the entities have to follow the instructions of parent company.
CONCLUSION
From the above project report it has been analysed that, advance financial accounting is a
form of accounting which is used by firm who are consolidated or in partnership or making
transactions in foreign currency. AASB 121 which is Australian Accounting Standards Board
has set rules for the companies who are having foreign currency monetary resources. The
organisations are directed to treat foreign currency monetary items and monetary items
separately and use different methods to record both of them.
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REFERENCES
Books and Journals:
Arnold, P. J., 2012. The political economy of financial harmonization: The East Asian financial
crisis and the rise of international accounting standards. Accounting, Organizations and
Society. 37(6). pp.361-381.
Bhattacharyya, A. K., 2012. Financial accounting for business managers. PHI Learning Pvt.
Ltd..
Cuckston, T., 2013. Bringing tropical forest biodiversity conservation into financial accounting
calculation. Accounting, Auditing & Accountability Journal. 26(5), pp.688-714.
Oulasvirta, L. O., 2014. Governmental financial accounting and European harmonisation: Case
study of Finland. Accounting, Economics and Law. 4(3). pp.237-263.
Porter, G. A. and Norton, C. L., 2012. Financial accounting: the impact on decision makers.
Cengage Learning.
Van Deventer, D. R., Imai, K. and Mesler, M., 2013. Advanced financial risk management: tools
and techniques for integrated credit risk and interest rate risk management. John Wiley
& Sons.
Online
AASB 121. 2012. [Online]. Available through:
<https://www.aasb.gov.au/admin/file/content102/c3/AASB121_07-
04_ERDRmay11_07-11>
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