Monetary Unit Assumption

Monetary unit assumption assumes that business transactions can be expressed in terms of units of currency without adjustment for inflation.

One of a function of money is that it is a unit of measurement which means that it can be used to measure an asset or liability.

Financial accounting is mainly concerned with impact of transactions and events which can be quantified in terms of currency units. If a company or its stakeholders are concerned with other aspects of its strategy and operations, other reporting frameworks, such as triple bottom line, corporate social responsibility reporting, etc., are more relevant.

One aspect of the monetary unit assumption is that currencies lose their purchasing power over time due to inflation, but in accounting we assume that the currency units are stable in value. This is alternatively called stable dollar assumption. This is why accounting figures are interpreted across time without adjusting them for inflation.

However, there are exceptional circumstances called hyperinflation when the accounting standards require adjustment of prior period figures. In such situations the monetary unit assumption does not hold.

The monetary unit assumption becomes less important as accounting standards allow more transactions to be accounted for under the fair value model.

Examples

A company's property, plant, and equipment on 20X9 statement of financial position amounted to $2 billion. During 20Y0 inflation rate was 10%. The monetary unit and stable dollar assumption prohibits any adjustment to current or prior period figures to account for the inflation.

The BP oil spill in Gulf of Mexico was a natural disaster but accounting only reports the financial impact in the form of claims paid, damages paid, cleanup costs, etc. This is due to the limitation imposed by the monetary unit assumption.

by Obaidullah Jan, ACA, CFA and last modified on
Studying for CFA® Program? Access notes and question bank for CFA® Level 1 authored by me at AlphaBetaPrep.com

XPLAIND.com is a free educational website; of students, by students, and for students. You are welcome to learn a range of topics from accounting, economics, finance and more. We hope you like the work that has been done, and if you have any suggestions, your feedback is highly valuable. Let's connect!

Copyright © 2010-2020 XPLAIND.com