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PAS 21 defines monetary items as money held and assets and liabilities to be received or paid in fixed or determinable amount of money.
The essential feature of a monetary item is a right to receive or an obligation to deliver a fixed or determinable amount of money. In simple language, monetary items refer to cash and assets that represent a fixed amount of pesos to be received, or obligations that represent a fixed amount of pesos to be paid. Monetary items are assets and liabilities whose amounts are fixed in the sense that the amounts ultimately realizable or the amounts ultimately payable are the same amounts that appear on the historical statements. Stated differently, assets and liabilities are classified as monetary because by their very nature, they are already expressed in terms of current pesos and therefore realizable or payable at no more or no less than their face or stated amounts. Monetary assets and liabilities remain the same regardless of the change in the general price level.

If an account receivable amounts to P500, 000 collectible after 3 years, such amount does not change regardless of the change in price level the 3- year period. When the account is collected ultimately, the amount realized is P500, 000, same amount as before. This account receivable is a monetary asset.

Similarly, if a P1, 000,000 is paid after 5 years, regardless of the change in price level, the same amount of P1,000,000 is paid after 5 years. This obligation is a monetary liability.

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Nonmonetary items, by the process of exclusion, may be defined as those items that cannot be classified as monetary. These items are so called nonmonetary because their peso amounts reported in the financial statements differ from the amounts that are ultimately realizable or payable. The essential feature of a nonmonetary item is the absence of a right to receive or an obligation to deliver a fixed or determinable amount of money.

Following is a list of statement of financial position items with their proper classification as monetary or nonmonetary.
Monetary
Cash Financial assets held for trading
Financial assets at fair value throughother comprehensive income

Nonmonetary
x x

Financial assets at amortized cost

Accounts and notes receivable

Allowance for doubtful accounts and notes

x
x x x x x

Inventories Advances to employees

Prepaid insurance, taxes, advertising rent

Prepaid interest

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Monetary

Nonmonetary

Receivables under finance lease

Long term receivables
Special deposits which are recoverable

x
x x x x x x

Pension, sinking and other fund:

Consisting of financial assets at fair value

Consisting of bonds at amortized cost

Property, plant and equipment Accumulated depreciation

Cash surrender value

Advances to suppliers Discount on bonds payable Intangible assets

x
x x x

Goodwill
Accounts and notes payable Accrued expenses Cash dividend payable x x x

Liability for refundable deposits

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Monetary

Nonmonetary

Advances from customers

Accrued losses on the firm purchase Commitments Bonds payable x x

Obligations under financial lease

Pension benefits to be paid in cash
Provisions that are to be settled in cash

x
x x x

Deferred revenue

Noncontrolling interest
Preference share capital Ordinary share capital Share premium

x
x x x

Retained earnings
Retained earnings is residual and should not be classified as either monetary or nonmonetary.

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Gain or loss on purchasing power

Purchasing power means the goods and services that money can buy. In a period of inflation or rising prices, a purchasing power loss is incurred on monetary assets and purchasing power gain is realized on monetary liabilities.

In a period of deflation or falling prices, a purchasing power gain is realized on monetary assets and a purchasing power loss is incurred on monetary liabilities.

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A person deposits P100, 000 in a savings account at the beginning of the current year to earn 8% interest. Five years later, having withdrawn neither the principal nor the interest, the depositor owns a passbook that shows a balance P146,930, which is the amount of P100, 000 compounded annually at 8% for 5 years. Obviously, there is a monetary income of P46,930 because the depositor now has more pesos than before. But economically speaking, is there gain or loss? If during the five-year period, the price level approximately increased 100%, then to maintain the purchasing power of the P 100, 000 in the current year, the depositor should have P 200, 000 after 5 years. But the depositor has only P 146, 930. Thus, there is an economic loss of P 53, 070. Clearly, when prices increase, the value of money decreases.

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A person borrows at the beginning of the current year P 100, 000 payable after 5 years at 7% interest compounded annually. The table of amounts shows that the value of P 100, 000 after 5 years at 7% compounded annually is P 140, 260. This is therefore, the amount to be paid by the debtor. If during the five- year period the price level increased by approximately 100%, then the creditor should receive at least P 200, 000 to maintain the purchasing power of the P 100, 000 in the current year. But he receives only P 140, 260. Thus, there is an economic loss on the part of the creditor, and an economic gain on the part of the debtor, in the amount of P59, 740. Clearly, when prices increase, it is more advantageous to incur fixed obligations rather than hold monetary assets.

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Procedures for restatement

1. The restatement is made by applying a general price index. 2. The items in the financial statements are classified into monetary and nonmonetary. 3. Monetary items are not restated because these are already expressed in terms of the monetary unit current at the end of reporting period. 4. Nonmonetary items are restated by applying the general price index from the date of acquisition to the end of reporting period. Some nonmonetary items are carried at amounts current at the end of reporting period, such as net realizable value and fair value. Thus, inventory carried at net realizable value and financial assets measured at fair value are no longer restated.

5. Some nonmonetary items are carried at amount current at date other than acquisition date. For example, property, plant and equipment are revalued. In such case, the carrying amounts are restated from the date of revaluation. 6. All items in the income statement are restated by applying the change in the general price index from the dates when the items of income and expenses were initially recorded. However, for practical purposes, the average index may be used. 7. The general purchasing power gain or loss is computed. This pertains only to monetary items. The gain or loss on purchasing power is included in profit or loss and separately disclosed

8. The restated amount of a nonmonetary item is reduced when it exceeds the recoverable amount. Hence, restated amounts property, plant and equipment, goodwill, patent and trademark are reduced to recoverable amount. Restated amount of inventory is reduced to net realizable value. 9. Any revaluation surplus recognized previously is eliminated. 10. Retained earnings would be the balancing figure in the restated statement financial position. 11. When comparative statements are prepared, the monetary items of the preceding year are expressed in terms of the index number at the end of the current year.

Examplar Company provided the following financial statements based on historical cost: EXAMPLAR COMPANY Statement of Financial Position December 31, 2011 (With comparative figures on December 31, 2010) Assets Cash Accounts receivable Allowance for doubtful accounts Inventories Land Building Accumulated depreciation Equipment Accumulated depreciation 2011 450,000 600,000 ( 20,000) 300,000 200,000 600,000 (240,000) 800,000 (320,000) 2,370,000 2010 400,000 450,000 ( 30,000) 350,000 200,000 600,000 (200,000) 800,000 (240,000) 2,330,000

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Liabilities and Share Holders Equity

Accounts payable Bonds payable Share capital Retained earnings

2011 250,000 500,000 1,000,000 620,000 2,370,000

2010 300,000 500,000 1,000,000 530,000 2,330,000

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EXAMPLAR COMPANY Statement of Income and Retained Earnings Year ended December 31, 2011 Sales Cost of sales: Inventory, January 1 350,000 Purchases 1,900,000 Goods available for sale 2,250,000 Inventory, December 31 ( 300,000) Gross Income Expenses: Distribution and administrative expenses 600,000 Depreciation building 40,000 Depreciation equipment 80,000 Interest expense 30,000 Income before tax 3,000,000

1,950,000 1,050,000

750,000 300,000

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Income before tax Less: income tax Net income Retained earnings, January 1 Total Less: Dividends paid as July 1 Retained earnings, December 31

300,000 75,000 225,000 530,000 755,000 135,000 620,000

The price index numbers prevailing at the date various assets and equities arose are as follows:
Date January January January January July December 1, 2005 1, 2005 1, 2005 1, 2007 1, 2011 31, 2011 Item Share capital Land Building Equipment Dividends Interest Index number 100 100 100 110 150 160

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a. Price rose evenly and index numbers expressing the general price level changes were:
January 1, 2010 December 31, 2010 December 31, 2011 Average for 2010 Average for 2010 130 140 160 135 135

b. Sales and purchases were made and expenses other than depreciation were incurred evenly. c. Inventory were reported at cost using FIFO and average index numbers for the year are applicable in restating inventories.

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The following is the restatement of the statement of financial position and income statement. Cash Cash on December 31, 2011 would remain at Cash on December 31, 2010 should be restated in terms of the December 31, 2011 price level because a comparative statement of financial position is prepared. The amount should be (400,000x160/140) Accounts receivable Balance on December 31, 2011, no change Balance on December 31, 2010 (450,000x160/140) Allowance for doubtful accounts December 31,2011, the same December 31,2010 (30,000x160/140)

450,000

457,143 600,000 514,286 20,000 34,286

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Inventories The restatement of inventories requires knowledge of the dates of acquisition and the historical cost. In example, it is assumed that the FIFO method is applied and average index numbers for the year are applicable in restating inventories. Accordingly, the inventories are restating as follows: December 31, 2011 December 31, 201 (300,000x160/150) (350,000x160/135) 320,000 414,815 320,000 320,000 960,000 960,000 465,455 349,091

Land

December 31, 2011 (200,000x160/100) December 31, 2010 (200,000x160/100) Building December 31, 2011 (600,000x160/100) December 31, 2010 (600,000x160/100) Accumulated depreciation building December 31, 2011 (320,000x160/110) December 31, 2010 (240,000x160/110)

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Accounts Payable December 31, 2011, the same 250,000 December 31, 201 (300,000x160/140) 342,857 Bonds payable December 31, 2011, the same 500,000 December 31, 2010 (500,000x160/140) 571,429 Retained earnings The retained earnings balance is the amount needed to balance the statement of financial position. It is therefore the residual amount or balancing figure. Sales Inasmuch as sales are spread evenly over the year, the average index for 2011 pesos. The amount should be (3,000,000x160/150) 349,091 Purchases The average index for 2011 is also used because the purchases are made evenly through the year. The amount should be (1,900,000)x160/150) 3,200,000 Copyright Wondersha

Distribution and administrative expenses The average index for 2011 is also used (350,000x160/135) Depreciation - Building 40,000x160/100 Depreciation - Equipment 80,000x160/110 Interest expense Same amount as reported because it is paid on December 31, 2011

414,815

64,000
116,364 30,000

Income tax The income tax is assumed to be incurred evenly throughout the year (75,000x160/150) 80,000 Dividends Since the dividends are paid on July 1, 2011, the index on that date is used (135,000x160/150) 144,000

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The following formula may be used in computing the constant peso net monetary assets at the end of current years: Monetary assets, beginning, restated Less: Monetary liabilities, beginning, restated Net monetary liabilities, beginning, restated Add: Increase in net monetary assets, restated Total Less: Decrease in net monetary assets, restated Net monetary assets, end, restated xx xx xx xx xx xx xx

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On January 1,2011, an entity had monetary assets of P5,000,000 and monetary liabilities of P3,000,000 and therefore net monetary assets of P2,000,000. During 2011, the entitys monetary inflows and outflows were relatively constant and equal so that it ended the year with the same net monetary assets of P2,000,000. The general price index number was 125 on January 1 and 200 on December 31, 2011. In this case, since there is no change in the net monetary assets, the gain or loss on purchasing power is simply computed as follows:
Net monetary assets December 31, 2011, historical cost Less: Net monetary assets December 31, 2011, restated (2,000,000x200/125) Loss on purchasing power 2,000,000 3,200,000 (1,200,000)

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a. The fact that the financial statements have been restated for changes in the general purchasing power of the reporting currency. b. Whether the financial statements are based on historical cost approach or current cost approach c. The nature and level of the price index at the end of reporting period and the movement in the index during the current and previous reporting period.

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