From Krause - "Catalogue on World Paper Money"
Grading is the most controversial component of paper money collecting today. Small differences in grade can mean significant differences in value. The process of grading is so subjective and dependent on external influences such as lighting, that even a very experienced individual may well grade the same note differently on separate occasions.
To facilitate communication between sellers and buyers, it is essential that grading terms and their meanings be as standardised and as widely used as possible. This standardisation should reflect common usage as much as praticable. One difficulty with grading is that even the actual grades themselves are not used everywhere and by everyone. For example, in Europe the grade "About Uncirculated" (AU) is not in general use, yet in North America it is widesread. The European term "Goof VF" may roughly correspond to what individuals in North Amercia would call "EF".
The grades and definitions as set forth cannot reconcile all the various systems and grading terminology variants. Rather, the attempt is made here to try and diminish the controversy with some common-sense grades and definitions that aim to give more precise meaning to the grading language of paper money
How to look at a banknote
In order to ascertain the grade of a note, it is essential to examine it out of a holder and under a good light. Move the note around so that the light bounces off at different angles. Try holding it up obliquely so that the note is almost even with your eye as you look up at the light. Hard-to-see folds or slight creases will show up under such examination. Some individuals also lightly feel along the surface of the note to detect creasing.
The term uncirculated
The word Uncirculated is used in this grading only as a qualitative measurement of the appearance of the note. It has nothing at all to do with whether or not an issuer has actually released the note to circulaiton. Thus, the term "About Uncirculated" is justified and acceptable because so many notes that have never seen hand-to-hand use have been mishandled so that they are available at best in AU condition. Either a note is uncirculated in condition or it is not; there can be no degrees of uncirculated. Highlights or defects in colour, centering and the like may be included in a description but the fact that a note is or is not in uncirculated condition should not be a disputable point.
Grading Guide - Definitions of terms
Uncirculated: A perfectly preserved note, never mishandled by the issuing authority, a bank teller, the public or a collector. Paper is clean and firm, without discoloration. Corners are sharp and square, without any evidence of rounding. (Rounded corners are often tell-tale sign of a cleaned or "doctored" note.) An uncirculated note will have its original, natural sheen.
About uncirculated: A virtually perfect note, with some minor handling. May show evidence of bank counting folds at a corner or one light fold through the centre, but not both. An AU note cannot be creased, a crease being a hard fold which has usually "broken" the surface of the note. Paper is clean and bright with original sheen. Corners are not rounded.
Extremely fine: A very attractive note, with light handling. May have a maximum of three light folds or one strong crease. Paper is clean and bright with original sheen. Corners may show only the slightest evidence of rounding. There may also be the slightest sign of wear where a fold meets the edge.
Very fine: An attractive note, but with more evidence of handling and wear. May have a number of folds both vertically and horizontally. Paper may have minimal dirt, or possible colour smudging. Paper itself is still relatively crisp and not floppy. There are no tears in the border, edges do show slight wear. Corners also show wear but not full rounding.
Fine: A note which shows considerable circulation, with many folds, creases and wrinkling. Paper is not excessively dirty but may have some softness. Edges may show more handling with minor tears in the border area. Tears may not extend into the design. There will be no center hole because of excessive folding. Colours are clear but not very bright. A staple hole or two would not be considered unusual wear in a fine note. Overall appearance is still on the desirable side.
Very good: A well used note, abused but still intact. Corners may have much wear and rounding, tiny nicks, tears may extend into the design, some discoloration may be present, staining may have occurred, and a small hole may be seen at center from excessive folding. Staple and pinholes are usually present, and the note itself is quite limp but NO pieces of the note can be missing. A note in VG condition may still have an overall not unattractive appearance.
Good: A well worn and heavily used note. Normal damage from prolonged circulation will include strong multiple folds and creases, stains, pinholes and/or staple holes, dirt, discoloration, edge tears, center hole, rounded corners and an overall unattractive appearance. No large pieces of the note may be missing. Graffiti is commonly seen on notes in G condition.
Fair: A totally limp, dirty and very well used note. Larger pieces may be half torn off or missing besides the defects mentioned under the Good category. Tears will be larger, obscured portions of the note will be bigger.
Poor: A "rag" with severe damage bacause of wear, staining, pieces missing, graffiti, large holes. May have tape holding pieces of the note together. Trimming may have taken place to remove rough edges. A poor note is desirable only as a "filler" or when such a note is the only one known of that particular issue.