General Price Level Accounting

General Price Level Accounting (GPLA) is a system of accounting in which financial statements are
adjusted according to changes in the purchasing power of the currency. This method of accounting,
also known as inflation accounting, aims to provide more accurate financial information by
considering the impact of inflation on financial statements.

In traditional accounting, financial statements are prepared based on historical costs, meaning the
price paid for an item when it was originally bought or produced, regardless of changes in its price
due to inflation or deflation over time.

In contrast, GPLA adjusts these historical costs to reflect their current value. This adjustment is
usually done by applying a general price index to the historical costs.

For example, if a company purchased a building for $100,000 ten years ago, and the inflation rate
over this period was 20%, the adjusted cost of the building would be $120,000 under GPLA.

Using GPLA can provide a more accurate picture of a company’s financial status in an inflationary or
deflationary environment. However, it can also make financial statements more complex and harder
to understand for those who aren’t familiar with this method. It’s worth noting that GPLA is not
widely used in practice, primarily due to these complexities and the fact that many accounting
standards, such as the International Financial Reporting Standards (IFRS) and Generally Accepted
Accounting Principles (GAAP), still rely on the historical cost principle.

Example of a General Price Level Accounting

Imagine a company, ABC Inc., bought a piece of machinery for $10,000 in 2015. In 2023, the
company wants to prepare its financial statements.

If ABC Inc. were using traditional accounting methods, the machinery would still be recorded on the
balance sheet at its historical cost of $10,000 (less any depreciation that might have been charged
over the years).

Now, let’s say the rate of inflation over these eight years has been 3% per year. If ABC Inc. was using
GPLA, the original cost of the machinery would be adjusted to reflect this inflation.
So, the adjustment would be:

$10,000 * (1 + 0.03) ^ 8 = $12,689.58

The machinery would be recorded in the 2023 financial statements at $12,689.58 (again, less any
depreciation over the years).

By doing this, ABC Inc.’s balance sheet reflects a more realistic replacement cost for the machinery,
taking into account the purchasing power of the dollar in 2023 as opposed to 2015. This can provide
a more accurate picture of the company’s current financial position in real terms.

It’s important to note that while this example makes it seem straightforward, in practice, GPLA can
be quite complex, as different items may need to be adjusted using different indexes and at different
rates. Furthermore, GPLA is not commonly used under most established accounting frameworks like
GAAP or IFRS.
What Are Nonmonetary Assets?

Nonmonetary assets are items a company holds for which it is not possible to precisely determine a
dollar value. These are assets whose dollar value may fluctuate substantially over time. A company
may need to change its nonmonetary assets as the assets wear out or become obsolete. An example
of this would be factory equipment and vehicles. Generally speaking, nonmonetary assets are assets
that appear on the balance sheet but are not readily or easily convertible into cash or cash
equivalents.

KEY TAKEAWAYS

A nonmonetary asset refers to an asset that a company holds that does not have a precise dollar
value and is not easily convertible to cash or cash equivalents.

Companies categorize nonmonetary assets as either tangible assets or intangible assets.

Examples of nonmonetary assets that are considered tangible are a company’s property, plant,
equipment, and inventory.

Examples of nonmonetary assets that are considered intangible are a company’s intellectual
property, such as its patents, copyrights, and trademarks.

In contrast, monetary assets can easily be converted to cash or cash equivalents for a fixed or
precisely determined amount of money.

Understanding Nonmonetary Assets

Nonmonetary assets are distinct from monetary assets. Monetary assets include cash and cash
equivalents, such as cash on hand, bank deposits, investment accounts, accounts receivable (AR),
and notes receivable, all of which can readily be converted into a fixed or precisely determinable
amount of money.

Nonmonetary assets, on the other hand, do not have a fixed rate at which the company can convert
them into cash. Typical nonmonetary assets of a company include both tangible assets and
intangible assets. Tangible assets have a physical form and are the most basic types of assets listed
on a company’s balance sheet. Examples of tangible assets are a company’s inventory and its
property, plant, and equipment (PP&E).

TRADE

CORPORATE FINANCE ACCOUNTING

Understanding Nonmonetary Assets vs. Monetary Assets

By JAMES CHEN Updated November 30, 2020

Reviewed by DAVID KINDNESS

Nonmonetary Assets

Investopedia / Julie Bang

What Are Nonmonetary Assets?

Nonmonetary assets are items a company holds for which it is not possible to precisely determine a
dollar value. These are assets whose dollar value may fluctuate substantially over time. A company
may need to change its nonmonetary assets as the assets wear out or become obsolete. An example
of this would be factory equipment and vehicles. Generally speaking, nonmonetary assets are assets
that appear on the balance sheet but are not readily or easily convertible into cash or cash
equivalents.

KEY TAKEAWAYS

A nonmonetary asset refers to an asset that a company holds that does not have a precise dollar
value and is not easily convertible to cash or cash equivalents.

Companies categorize nonmonetary assets as either tangible assets or intangible assets.

Examples of nonmonetary assets that are considered tangible are a company’s property, plant,
equipment, and inventory.

Examples of nonmonetary assets that are considered intangible are a company’s intellectual
property, such as its patents, copyrights, and trademarks.

In contrast, monetary assets can easily be converted to cash or cash equivalents for a fixed or
precisely determined amount of money.

Understanding Nonmonetary Assets

Nonmonetary assets are distinct from monetary assets. Monetary assets include cash and cash
equivalents, such as cash on hand, bank deposits, investment accounts, accounts receivable (AR),
and notes receivable, all of which can readily be converted into a fixed or precisely determinable
amount of money.

Nonmonetary assets, on the other hand, do not have a fixed rate at which the company can convert
them into cash. Typical nonmonetary assets of a company include both tangible assets and
intangible assets. Tangible assets have a physical form and are the most basic types of assets listed
on a company’s balance sheet. Examples of tangible assets are a company’s inventory and its
property, plant, and equipment (PP&E).
In contrast, intangible assets are not physical in nature. Companies can acquire intangible assets or
they can create them. Examples include copyrights, design patents, trademarks, brand recognition,
and goodwill.

Special Considerations

It is not always clear as to whether an asset is a monetary or nonmonetary asset. The deciding factor
in such instances is whether the asset’s value represents an amount that can be converted into a
determined cash or a cash equivalent amount within a very short span of time. If it can be converted
into cash easily, the asset is considered a monetary asset. Liquid assets are assets that can easily be
converted into cash in a short amount of time. If it cannot be readily converted to cash or a cash
equivalent in the short term, then it is considered a nonmonetary asset.

Nonmonetary Assets vs. Nonmonetary Liabilities

In addition to nonmonetary assets, companies also commonly have nonmonetary liabilities.

Nonmonetary liabilities include obligations that cannot be met in the form of cash payments, such as
a warranty service on goods a company sells. It is possible to determine the dollar value of such a
liability, but the liability represents a service obligation rather than a financial obligation such as
interest payments on a loan.

Differences Between Monetary and Nonmonetary Assets

Dollar values are the accepted measure for quantifying a company’s assets and liabilities as they are
presented in a company’s financial statements. However, nonmonetary assets and liabilities that
cannot be readily converted to cash are also included in a company’s balance sheet. Common
examples of nonmonetary assets are the real estate a company owns where its offices or a
manufacturing facility are located, and intangibles such as proprietary technology or other
intellectual property.

These items are undeniably assets, but their current value is not always apparent as it changes over
time in accordance with economic and market conditions and forces. For example, marketplace
competition changes the dollar value of a company’s inventory as the company adjusts its market
price in response to price competition from other companies or to the demand for the company’s
products. General economic forces such as inflation or deflation also impact the value of
nonmonetary assets such as inventory or manufacturing facilities.
A company can use its monetary assets to fund capital improvements or to pay for day-to-day
operational expenses. A company will use its nonmonetary assets to help generate revenue. For
example, a company can use its factory and equipment to produce the products it will sell to its
customers.