Monetary /Non-Monetary method

The monetary/non-monetary method differentiates between monetary & non-monetary items.

· Monetary items are those that represent a claim to receive or an obligation (responsibility) to pay a fixed amount of foreign currency unit, e.g. cash, accounts receivable, current liabilities, accounts payable & long-term debt.

· Non monetary items are those items that do not represent a claim to receive or an obligation to pay a fixed amount of foreign currency items e.g. inventory, fixed assets, long –term investments.

According to this method,

· All monetary items are translated at the current rate while non monetary items are translated at historical rates.

· Income statement items are translated at the average exchange rate for period (except for items such as depreciation & cost of goods sold (cogs) that are directly associated with non-monetary assets or liabilities. These accounts are translated at their historical rates.)