What is Monetary Unit Assumption?
The monetary unit assumption is a foundational accounting principle that requires financial transactions and balances to be measured and reported in a single, stable currency. It also assumes the purchasing power of that currency is reasonably stable over time, allowing meaningful aggregation of amounts from different periods (with exceptions for hyperinflationary economies under IAS 29).
How It Works
- Choose the functional currency: the currency of the primary economic environment.
- Record all transactions in the functional currency at the exchange rate on the transaction date.
- Aggregate historical and current amounts on the assumption of stable purchasing power.
- Apply IAS 29 if the functional currency is hyperinflationary (cumulative 3-year inflation around 100%).
- Translate to a presentation currency under IAS 21 where the two differ.
Saudi Context
The Saudi Riyal (SAR) is the functional and presentation currency for nearly all domestic businesses. Because Saudi inflation has historically been low and the SAR is pegged to the USD, the monetary unit assumption holds well. Multinational groups with Saudi operations sometimes translate SAR results into USD or EUR for group reporting per IAS 21.
Example
A Saudi trading company aggregates SAR 5 million in revenue from 2024 with SAR 6 million from 2025, treating both as comparable units of measurement. The figures are presented together in the income statement on the assumption that the SAR’s purchasing power has been reasonably stable across the two years.