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Distinguishing the Unit of Account from the Unit of Measure

July 22, 2014 in Uncategorized

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 nominalunits 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

With Bitcoin, generally accepted terms trump economic science

July 15, 2014 in Uncategorized

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

July 9, 2014 in Uncategorized

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

Bitcoin is not a monetary unit of measure or unit of accountA 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.

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.

Definition of hyperinflation

June 29, 2014 in Uncategorized

Definition of hyperinflation


The generally accepted definition of hyperinflation in the world economy is 100% cumulative inflation over three years. It comes to 26% annual or 1.95% monthly inflation for three years in a row.

The above definition is currently being used by the 147 countries that implement International Financial Reporting Standards as issued by the International Accounting Standards Board. This definition has been used since April 1989 by the millions of accountants, business people, economists and all governments who implement IFRS. 

This definition of hyperinflation is contained in IAS 29 Financial Reporting in Hyperinflationary Economies that was authorized by the IASB in April 1989. 

“Par 3. This Standard does not establish an absolute rate at which hyperinflation is deemed to arise. It is a matter of judgement when restatement of financial statements in accordance with this Standard becomes necessary. Hyperinflation is indicated by characteristics of the economic environment of a country which include, but are not limited to, the following:

(a) the general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held
are immediately invested to maintain purchasing power;

(b) the general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices
may be quoted in that currency;

(c) sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if
the period is short;

(d) interest rates, wages and prices are linked to a price index; and

(e) the cumulative inflation rate over three years is approaching, or exceeds, 100%.”

There is today not one government in the world economy that uses any other definition of hyperinflation. 

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

High Frequency Traders make technology profits

June 21, 2014 in Uncategorized

High Frequency Traders make technology profits.

They make almost no profit per trade over almost no time with almost no risk millions of times.

Nicolaas Smith 


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

Daily inflation-indexing of the entire money supply would remove the effect of inflation or deflation (not actual inflation or deflation)

June 10, 2014 in Uncategorized

Daily inflation-indexing of the entire money supply would remove the effect of inflation or deflation (not actual inflation or deflation)

Daily inflation-indexing of the entire money supply would remove the effect of inflation or deflation (not actual inflation or deflation).

This happens daily with the USD 3 trillion plus in global government inflation-indexed bonds.

Chile today inflation-indexes more than 25% of its entire money supply on a daily basis.

Why not 100%? What is wrong with doing away with the effect of inflation or deflation completely?

Nicolaas Smith

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

Capital Maintenance in Units of Constant Purchasing Power stops destruction of real value under HCA

June 6, 2014 in Uncategorized

Capital Maintenance in Units of Constant Purchasing Power stops destruction of real value under HCA

IFRS and US GAAP authorised Capital Maintenance in Units of Constant Purchasing Power™ (CMUCPP) maintains the constant purchasing power of constant real value non-monetary items (salaries, wages, pensions, taxes, trade debtors/creditors, equity) only in terms of a Daily CPI in entities that break even in real value in inflation and deflation - ceteris paribus

It would stop the global destruction by the stable measuring unit assumption in constant items of hundreds of billions of USD p.a. now taking place under traditional Historical Cost Accounting.

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

Difference between local currency and foreign currency

June 2, 2014 in Uncategorized

Difference between local currency and foreign currency

Foreign currencyForeign currency is always created in a foreign economy. Foreign currency is always a variable real value non-monetary item like, for example, property, plant, equipment, listed and unlisted shares, etc. A foreign currency with a floating exchange rate´s continuously changing daily value is determined in foreign currency markets. Foreign currency gains or losses are recorded in the financial reports under all accounting models including traditional Historical Cost Accounting. Foreign currency is traded daily on many foreign currency exchange markets. A foreign currency with a floating exchange rate has a continuously changing price or real value. A foreign currency with a floating exchange rate can increase and decrease in price daily (minute by minute).

Local currency

Local currency is always fiat money created in the local economy. A local currency is always a monetary item with an assumed to be perfectly stable real value over time whereas a foreign currency is always a variable real value non-monetary item. However, a local currency´s daily changing real value is determined by the rate of inflation or deflation in the local economy as indicated by the Daily CPI during low inflation, high inflation and deflation and by the Daily US Dollar parallel rate during hyperinflation. Although a local currency is generally not stable in real value, it is assumed that the local currency is perfectly stable in real value over time for the purpose of being used as the “assumed-to-be” perfectly stable monetary unit of account in the local economy for accounting purposes under the Historical Cost and Current Cost Accounting models. Under the Capital Maintenance in Units of Constant Purchasing Power (CMUCPP) accounting model monetary items are generally inflation-adjusted on a daily basis and constant real value non-monetary items are measured daily in units of constant purchasing power generally in terms of the Daily CPI.

Local currency net monetary gains and losses as a result of inflation and deflation are not recorded in the financial reports under HCA and CCA during low inflation, high inflation and deflation. They are calculated and accounted under Capital Maintenance in Units of Constant Purchasing Power during hyperinflation as required under IAS 29 Financial Reporting in Hyperinflationary Economies. During low inflation and deflation local currency is not traded in the local market because local currency is assumed to be perfectly stable in real value over time. Local currency´s real value is indicated by inflation and deflation. However, during high inflation and hyperinflation, local currency is traded in the local market. This market is called the parallel or black market as opposed to the normal foreign exchange market.

Local currency´s real value is determined by all the underlying value systems in the local economy, e.g., good or bad national governance, a good or bad economy, good or bad monetary policies, a good or bad legal system, a good or bad health system, a good or bad educational system, a good or bad police force, etc, etc. The daily change in local currency´s real value is indicated by the daily change in the Daily CPI during low and high inflation and deflation and by the daily US Dollar parallel rate during hyperinflation.

The total of local currency held locally plus held outside the local economy (as foreign currency by other countries) make up the money supply.  Daily inflation-indexing the local money supply, i.e., all monetary items in the local economy, would eliminate only the effect of inflation or deflation in the local economy: it would leave local inflation or deflation intact. However, it would be as if there is no inflation or deflation in the local economy.

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

Generally accepted definition of hyperinflation

June 1, 2014 in Uncategorized

Generally accepted definition of hyperinflation

The generally accepted definition of hyperinflation in the world economy is 100% cumulative inflation over three years. It comes to 26% annual or 1.95% monthly inflation for three years in a row.

The above definition is currently being used by the 147 countries that implement International Financial Reporting Standards as issued by the International Accounting Standards Board. This definition has been used since April 1989 by the millions of accountants, business people, economists and all governments who implement IFRS.

This definition of hyperinflation is contained in IAS 29 Financial Reporting in Hyperinflationary Economies that was authorized by the IASB in April 1989.

“Par 3. This Standard does not establish an absolute rate at which hyperinflation is deemed to arise. It is a matter of judgement when restatement of financial statements in accordance with this Standard becomes necessary. Hyperinflation is indicated by characteristics of the economic environment of a country which include, but are not limited to, the following:

(a) the general population prefers to keep its wealth in non-monetary assets or in a relatively stable foreign currency. Amounts of local currency held
are immediately invested to maintain purchasing power;

(b) the general population regards monetary amounts not in terms of the local currency but in terms of a relatively stable foreign currency. Prices
may be quoted in that currency;

(c) sales and purchases on credit take place at prices that compensate for the expected loss of purchasing power during the credit period, even if
the period is short;

(d) interest rates, wages and prices are linked to a price index; and

(e) the cumulative inflation rate over three years is approaching, or exceeds, 100%.”

There is today not one government in the world economy that uses any other definition of hyperinflation.

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

IFRS / US GAAP authorized solution to the Historical Cost Mistake

May 31, 2014 in Uncategorized

IFRS / US GAAP authorized solution to the Historical Cost Mistake


Financial capital maintenance in units of constant purchasing power is authorized in both IFRS and US GAAP as the alternative to Historical Cost Accounting, i.e., financial capital maintenance in nominal monetary units (or the Historical Cost Mistake).

The Historical Cost Mistake is, obviously, fixed with Daily Indexing: Capital Maintenance in Units of  Constant Purchasing Power in terms of the Daily CPI during low inflation and high inflation and deflation and in terms of the US Dollar parallel rate during hyperinflation.

Daily Indexing

1. Accounting Daily Indexing
2. Comprehensive Daily Indexing

1. Accounting Daily Indexing is implementing CMUCPP in terms of the Daily CPI instead of HCA. That only eliminates the destruction of the real value of constant real value non-monetary items never or not fully maintained constant in real value by HCA. Accounting Daily Indexing keeps the constant real value non-monetary economy perfectly stable by stopping the stable measuring unit assumption in accounting, i.e. stopping HCA.

2. Under Comprehensive Daily Indexing, Accounting Daily Indexing is combined with daily inflation-indexing of the entire money supply in terms of the Daily CPI. Daily inflation-indexing of all monetary items additionally eliminates the effect of inflation and deflation from only monetary items. However, daily inflation-indexing of all monetary items does not stop inflation or deflation. Daily inflation-indexing of all monetary items stops the destruction of the real value of monetary items over time by inflation and it stops the increase in the real value of monetary items over time during deflation. It only eliminates the effect of inflation and deflation on only monetary items. It would be as if there is no inflation or deflation – while actual inflation or deflation continues.

For example, Daily Inflation-indexing the $3 trillion in global government inflation-indexed bonds maintains the real value of this USD 3 trillion perfectly stable over time on a daily basis, but it does not stop the inflation or deflation in the countries concerned. The inflation or deflation continues, but it is as if there is no inflation or deflation for the holders of the $3 trillion sovereign capital inflation-adjusted bonds inflation-indexed daily in all the different countries where the actual inflation and deflation continue while these monetary conditions are created by the specific central banks.

Daily inflation-indexing only removes the effect of inflation and deflation. It does not stop inflation or deflation. It is as if there is no inflation or deflation.
Accounting and Comprehensive Daily Indexing are free, authorized under IFRs and US GAAP and available to all countries and economies.

Daily Indexing is free. It kills the need for very costly Dollarization or a currency board at no cost while the countries’  central banks maintain their full monetary creation and monetary policy powers (what they lose under Dollarization and a currency board).

Copyright © 2008 Nicolaas Smith

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