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Tuesday, 22 July 2014

Distinguishing the Unit of Account from the Unit of Measure

"Distinguishing the Unit of Account from the Unit of Measure

The term “unit of account” does not appear in the conceptual framework, although the term “unit of measure” does, and both terms appear in accounting standards. 

However, because unit of measure and unit of account are sometimes treated as synonyms, we discuss the distinction between the two terms next. 

The Unit of Measure in the FASB’s Conceptual Framework

 The FASB Discussion Memorandum, An Analysis of Issues Related to Conceptual Framework for Financial Accounting and Reporting: Elements of Financial Statements and Their Measurement (1976), a publication that preceded the FASB’s Concepts Statements, describes the unit of measure in terms of the monetary unit to be used; that is, whether it should be nominal units of money as opposed to units that are adjusted for changes in purchasing power over time (paragraphs 384-7). FASB Concepts Statement No. 1, Objectives of Financial Reporting by Business Enterprises (1978), and Concepts Statement 6, mention unit of measure but do not define or describe it. FASB Concepts Statement 2, Qualitative Characteristics of Accounting Information (1980), uses the term without defining it but discusses it in the context of making comparisons based on units of money or units of invariant purchasing power (paragraph 114). 

FASB Concepts Statement No. 5, Recognition and Measurement in Financial Statements of Business Enterprises (1984), describes the unit of measure in terms of nominal units of money or units of constant purchasing power, and then further describes it in terms of artificial monetary units 3 or units of a commodity, such as ounces of gold (paragraph 71). 

In the FASB’s conceptual framework, therefore, unit of measure refers to the numerals used in accounting measurement, in conjunction with recognition in financial statements or with disclosure in the notes to the financial statements. More specifically, it refers to the measurement unit (such as nominal dollars or price-level adjusted dollars), as opposed to the measurement attribute (such as historical cost or fair value). 

In contrast to the numerals that are used to measure an item, the unit of account refers to the words that are used to describe the item. That is, it relates to the specific assets and liabilities that are reported in financial statements rather than the units used to measure them. That is, unit of account refers to the object of recognition or display whereas unit of measure refers to the tool for measuring it.

The Unit of Measure in Accounting Standards 

 Unit of measure appears in several accounting standards. Those standards generally use the term in a manner that is consistent with its use in the Concepts Statements. 

For example, FASB Statement No. 19, Financial Accounting and Reporting by Oil and Gas Producing Companies (1977), discusses converting oil and gas reserves and oil and gas produced to a common unit of measure based on their relative energy content (paragraph 38). FASB Statement No. 52, Foreign Currency Translation (1981), uses the term in its Basis for Conclusions and defines the term in its glossary as “the currency in which assets, liabilities, revenues, expenses, gains, and losses are measured.” These uses of the term are consistent with the general meaning of the term in the Concepts Statements."

Copyright (c) Johnson, L.T., The Unit of Account Issue, Financial Accounting Standards Research Initiative

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Unit of account and unit of measure are very often used as synonyms in economics and accounting. However, unit of account has a very specific definition in accounting in International Financial Reporting  Standards and US GAAP that is not a nominal monetary unit of measure; not fiat money or a fiat currency. In IFRS and US GAAP, a unit of account are the words used to describe an asset unit or liability unit for accounting purposes.

Nicolaas Smith