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

With Bitcoin, generally accepted terms trump economic science

With Bitcoin, generally accepted terms trump economic science

An American federal judge stated that bitcoin is a unit of account, meaning monetary unit of measure. Bitcoin is a very unstable variable real value non-monetary item, not a monetary unit of measure. Bitcoin can never be a monetary unit of measure because it is not a monetary item. All monetary units of measure are assumed to be perfectly stable in real value for accounting purposes during low and high inflation and deflation. Bitcoins are not perfectly stable in real value and will never be assumed to be perfectly stable in real value because a bitcoin is a variable real value non-monetary item. Monetary unit of measure only refers to a fiat currency unit of measure. 

Bitcoin is universally referred to as a currency. It can never be a currency. It is not a monetary item. It is a variable real value non-monetary item similar to rare digital stamps. All fiat currencies are assumed to be perfectly stable in real value during low and high inflation and deflation for accounting purposes. Bitcoin will never be assumed to be perfectly stable in real value. 

Everyone is 100% sure that bitcoin is a decentralized payment platform. In fact, all bitcoins only exist in the single, centralized Bitcoin Public Ledger or single bitcoin repository. All bitcoins are deposited in this single repository. However, everyone is 100% sure it is a decentralized system. 

Mining, the creation of bitcoins, is assumed or supposed to be decentralized, but all bitcoins are then deposited in the single central repository called the Bitcoin Public Ledger where they stay centralized in one place forever. Currently the company GHash controls 51% of mining which is a very dangerous situation for the Bitcoin system. 

Public opinion and public practice will always override science in matters like these. 

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.

Bitcoin is not a monetary unit of measure or unit of account

Bitcoin is not a monetary unit of measure or unit of account

A monetary unit of measure is often mistakenly called a unit of account by the man in the street and even by a US federal judge. See 

Distinguishing the Unit of Account from the Unit of Measure

Money is always a monetary unit of measure. The best known monetary units of measure are the best known fiat currencies in use today: US Dollar, Euro, Pound, Peso, Rouble, Yuan, Yen, Shilling, etc. All fiat currencies are monetary units of measure.

They are all monetary items when used inside the economy where they are created. They are variable real value non-monetary items when used as foreign exchange outside the economy where they are created.

Money (any fiat currency) as the monetary unit of measure is the only unit of measure that is not based on a constant value. It is thus assumed for accounting purposes only under Historical Cost Accounting and Current Cost Accounting (which implement the stable measuring unit assumption) that all monetary units of measure are perfectly stable in real value for the purpose of measuring monetary items not inflation-indexed and constant real value non-monetary items only during low and high inflation and deflation.

All other units of measure are based on constant values, e.g., inch, foot, yard, mile, kilometer, meter, pound, gram, ounce, watt, etc.

A monetary unit of measure is an assumed to be perfectly stable in real value, monetary item (fiat currency) - in the economy where it is created - used to account economic activity in terms of the double entry accounting model.

The best known double entry accounting model is the traditional, generally accepted, globally implemented Historical Cost Accounting model.

Other double entry accounting models are:

Capital Maintenance in Units of Constant Purchasing Power in terms of the Daily CPI.

Current Cost Accounting 

Thus, bitcoin, the digital unit of the Bitcoin digital payment platform, is not a monetary unit of measure,  because all units of measure are either based on a perfectly constant base unit (e.g., inch, centimeter, gallon, pint, watt, ohm, etc.) or - only in the case of monetary items - assumed to be perfectly stable in real value only during low and high inflation and deflation and only under the Historical Cost Accounting and Current Cost Accounting models. 

A bitcoin is not a monetary unit of measure because economic items are not generally priced or measured in bitcoins. No financial reports are prepared in bitcoins. No set of accounts is prepared in bitcoins.

Monetary units of measure are all monetary items (currencies) assumed to be perfectly stable in real value only during low and high inflation and deflation only under HCA and CCA.

Bitcoins are not perfectly stable in real value and are not and cannot be assumed to be perfectly stable in real value because they are not monetary items.

Bitcoin is always a variable real value non-monetary item similar to a limited issue rare stamp in digital form.

Thus, bitcoin is not and cannot be a monetary unit of measure for accounting purposes. Bitcoin is not a monetary unit of measure because it is not perfectly stable in real value and it is not and it cannot be assumed to be perfectly stable in real value because a bitcoin is not a monetary item.

Bitcoin is a digital variable real value non-monetary item. The bitcoin digital units are numbered in terms of the normal numbering system: 1, 2, 3, ..... 

The fact that a US federal judge referred to bitcoin as a unit of account (mistakenly meaning monetary unit of measure) does not constitute a binding definition or description since it was made under US common law. Any other US common law judge can have a different opinion.

Nicolaas Smith Copyright (c) 2005-2014 Nicolaas J Smith. All rights reserved. No reproduction without permission.