Nonmonetary Transaction

What Is a Nonmonetary Transaction?

A nonmonetary transaction occurs when a business or commerce activity concludes without the transfer of money between accounts for parties tied to the transaction. Nonmonetary transactions can be something as simple as a change of address or can refer to more complex transactions in the financial sector.

For example, a $0 deposit to initiate an automated clearing house transaction (e.g., direct deposit or auto-withdrawal) would be considered a nonmonetary transaction. The even, or in-kind, exchange of assets (e.g., transferring property or inventory) is another nonmonetary transaction. In cases of property exchange, the fair values of the underlying assets need to be determined, if possible.

Understanding Nonmonetary Transactions

Nonmonetary transactions can be either reciprocal or nonreciprocal. Reciprocal (two-way) nonmonetary transactions involve two or more parties exchanging nonmonetary goods, services, or assets. Nonreciprocal (one-way) nonmonetary transactions involve the transfer of goods, services, or assets from one party to another, such as a business making an in-kind donation of employee volunteer time or physical items to another organization.

Payment-in-kind (PIK) is the use of a good or service as payment instead of cash. Payment-in-kind also refers to a financial instrument that pays interest or dividends to investors of bonds, notes, or preferred stock with additional securities or equity instead of cash. Payment-in-kind securities are attractive to companies preferring not to make cash outlays and they are often used in leveraged buyouts.

In either case, in-kind transactions are nonmonetary. For example, a farmhand who is given a "free" room and board instead of receiving an hourly wage in exchange for helping out on the farm is an example of payment-in-kind.

The Internal Revenue Service (IRS) refers to payment-in-kind as bartering income.

The IRS requires people who receive payment-in-kind income through bartering to report it on their income tax return. For example, if a plumber accepts a side of beef in exchange for services, he should report the fair market value of the beef or his usual fee as income on his income tax return.

Issues with Nonmonetary Transactions

Naturally, nonmonetary transactions raise a host of issues surrounding the nature of a transaction or business relationship. It is not uncommon for ethical, moral, and legal gray areas to be crossed when money is not directly tied to a transaction — which should be expected, seeing money is the most common medium of exchange.

A classic business expression applies here: there is no free lunch. Rarely is business as altruistic to expect one party to offer value to another, without expecting something in return. This expectation is not always money. For instance, in politics — which often is closely tied to business — politicians often accept or are parties to nonmonetary transactions. It is often far too tempting for a donor not to expect some favor in return.

Nonmonetary transactions beyond standard administrative transactions can quickly descend into a quid pro quo situation. The Latin expression is best summed up as "something for something." One party grows to expect something in return for a favor, which doesn't necessarily have to be monetary in nature.