Monetary/Nonmonetary Method
The monetary/nonmonetary method differentiates between monetary assets and liabilities—that is, those items that represent a claim to receive, or an obligation to pay, a fixed amount of foreign currency units—and nonmonetary, or physical, assets and liabilities. Monetary items (e.g., cash, accounts payable and receivable, and long-term debt) are translated at the current rate; nonmonetary items (e.g., inventory, fixed assets, and long-term investments) are translated at historical rates.
Income statement items are translated at the average exchange rate during the period, except for revenue and expense items related to nonmonetary assets and liabilities. The latter items, primarily depreciation expense and cost of goods sold, are translated at the same rate as the corresponding balance sheet items. As a result, the cost of goods sold may be translated at a rate different from that used to translate sales.