Non-Monetary Assets

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21 Aug, 2024

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Non-Monetary Assets Meaning

Non-monetary asset, in financial accounting, refers to all tangible and intangible assets that do not have a fixed monetary value. The primary purpose of these assets is to serve as an essential component of the business that aids in its daily operations.

These non-monetary assets and liabilities hold a long-term value in the financial records. They provide a source of revenue for the firm. Also, they have a competitive add-on advantage in terms of intangible items. In addition, they can also act as collateral against debt financing. However, it can be challenging to determine non-monetary asset value.

Non-Monetary Asset Meaning

Non-monetary assets refer to items that do not hold the feature of liquidity. In short, turning them into cash is not easy. Thus, it is difficult to determine their value.
It includes two types of assets, namely tangible and intangible.
Intangible assets include patents, trademarks, copyrights, intellectual property rights, and more. During mergers, the firms can indulge in non-monetary asset exchange.
Here, entities exchange assets with each other at a boot price and commercial substance. Later, determining gain or loss becomes easy.

Non-Monetary Assets Explained

The non-monetary asset is a balance sheet item with no fixed value for converting it into cash. In addition, the non-monetary assets' value keeps on changing daily. Therefore, it means it is difficult to determine the precise value of these assets. However, they play a vital role in the functioning of the business as they have frequent use.

This category includes two major types of assets. It includes tangible and intangible assets. Tangible assets include items that have the physical quality to touch and use. Some instances include property, plant, equipment, machinery, and inventory. In contrast, intangible assets consist of items that have no physical appearance. However, they have the utmost importance to the business. It includes patents, trademarks, copyrights, intellectual property rights, and more.

It is important to note that both asset types have no fair market value. Moreover, certain factors can influence the fair value of non-monetary assets and liabilities, like inflation level, depreciation rate, and other macroeconomic factors. For example, the value of inventory will depend on the market forces of demand and supply. In contrast, the property value fluctuates in response to inflation.

Furthermore, the accounting treatment of non-monetary assets differs in books. Every listed asset incurs associated expenses. However, non-monetary assets have specific issues listed. The constant fluctuation of these assets can cause an improper balance of the company's portfolio. In addition, it is quite hectic to forecast a precise asset value. Also, these assets bring certain regulatory risks and legal issues to the firm.

Hence, for instance, if the company's intellectual property or patent collides with another firm, it can cause legal hindrances. Thus, an identifiable non-monetary asset meets specific criteria related to control, cost measurability, expected future economic benefits, and separability.

Examples

Let us look at the examples of non-monetary assets to comprehend the concept better:

Example #1

Let's consider a fictional scenario involving a marketing agency called Merkle Inc. In the course of its operations, the agency invests in building a strong brand reputation, creating a unique and recognizable logo, and establishing a memorable company slogan. While these elements don't have a physical presence, they collectively form a valuable non-monetary asset known as goodwill. Hence, the goodwill associated with the agency represents the positive public perception, client relationships, and the reputation it has built over the years.

Therefore, this intangible asset becomes an essential component of the agency's overall value. The agency's clients are more likely to choose its services over competitors due to the trust and credibility associated with its brand. While goodwill doesn't appear on the balance sheet as a tangible asset, its impact on client retention and new business opportunities contributes significantly to the agency's long-term success and market position. Thus, this non-monetary asset showcases how intangible elements can be vital in determining the value and competitiveness of a business.

Example #2

According to OLD Mutual Insurance Company (OMI), its investment strategy has remained heavily weighted towards non-monetary assets, and the company is looking for chances to invest any extra cash in companies that are part of the short-term insurance value chain.

The Zimbabwe National Numbers Agency has revealed blended inflation numbers that show monthly inflation increasing uncontrollably in May 2023, up 13.3 percentage points from the rate of 2.4% to 15.7% in April 2023.

Moreover, the company claims that despite robust growth in US dollar premiums, clients continued to select plans denominated in US dollars. We kept looking into ways to manage resources wisely and protect shareholder value in an inflationary operating environment.

Non-Monetary Assets Exchange

The exchange of non-monetary assets refers to transactions in which entities swap assets without involving cash. From the business perspective, non-monetary items are treated as a source of revenue for the firm. However, there can be instances where a business engages in mergers and acquisitions.

Non-monetary asset exchanges can occur for strategic reasons, such as when two companies see value in each other's assets and decide to trade rather than purchase through cash transactions. It allows entities to optimize their asset portfolios, acquire assets that better fit their needs, or divest assets that are no longer aligned with their strategic objectives. There are three types of situations that primarily involve non-monetary asset exchange. It includes transfers between subsidiaries, mergers and acquisitions, and stock or dividend splits. However, each of them involves non-monetary exchange rules. Let us look at them:

Losses are never ignored.
An asset transferred is immediately removed from the books.
Assets transferred must be recorded at their fair value when gains and losses have occurred.
In contrast, if no gains or losses are noted, the asset exchanged must be recorded at the book value.
No gain is recorded when similar assets are exchanged, as the earning period starts after the complete transfer.
Likewise, gains from different assets are noted in the books.

In addition, this exchange also includes a commercial substance. It acts as a protective gear if the future cash flows of the firm change due to the asset. For example, if the parties exchange dissimilar assets, the commercial substance has a high chance of occurrence.

Non-monetary Assets vs Monetary Assets

Although non-monetary and monetary assets comprise the firm's entire portfolio, they have distinct features. So, let us look at the differences between them:

Aspect	Non-Monetary Asset	Monetary Asset
Meaning	It refers to assets that do not have a fixed monetary value.	Monetary assets are balance sheet items held as cash in the financial statements.
Purpose	Businesses can use these assets as a medium of exchange during mergers and acquisitions.	To pay all the expenses, bills, and obligations of the business.
Liquidity	Hence, it takes work to convert them into cash..	They are already in cash form. Therefore, it has the highest liquidity.
Examples	These include tangible and intangible assets like plants, machinery, inventory, and patents.	Cash balance, bank deposits, short-term investments, and others.
Applications	As asset transfer during mergers and acquisitions.	Moreover, these assets are used daily.

Frequently Asked Questions (FAQs)

1. Are prepayments non-monetary assets?

Yes, prepayments can be non-monetary assets if the payment is for goods and services deemed to be received in the future. However, if the same advance payment is made to the supplier before the goods are delivered, it is a monetary asset. Thus, prepayments are both non-monetary and monetary assets.

2. How do non-monetary assets contribute to net worth?

Items that fall under these assets are plant, property, machinery, equipment, and inventory. So, if the firm starts production on a particular piece of land, a certain inventory level will be produced with the help of machinery and equipment. As a result, on sales, the firm will earn huge revenues that will add to the future cash flows or net worth.

3. Can non-monetary assets be impaired?

Yes, impairment tests may be performed on these assets, particularly intangible assets. An impairment loss is recorded, lowering the asset's value on the balance sheet, if the carrying amount of an asset exceeds its recoverable amount.