The fast expanding cryptocurrency market urgently needs accounting guidance. But powerful bodies like the IASB are still figuring it out.
Cryptocurrencies are evolving fast. With advances in point-of-sale technology and clearinghouse efficiencies and the rise of US dollar-pegged cryptos, what once were speculative assets are beginning to be accepted as vehicles for everyday transactions.
Certainly, there are a lot more of them than even a year ago. As of mid-June, according to CoinMarketCap, the total market cap for cryptocurrency was $264.67 billion and the number of cryptocurrencies trading topped out at 2,236.
Many close observers now expect the use of cryptocash to rise steadily, along with the number of companies holding it somewhere on their books. But how to fit this new asset and medium of exchange into generally accepted accounting standards? Digital asset and blockchain promoters and industry groups are calling for the setters of accounting standards to create rules of the road.
“Although use and acceptance of digital currencies as a method of payment are not yet widespread, the increasing volume of transactions using digital currencies indicates the current need to develop accounting guidance,” the Digital Assets Accounting Consortium (DAAC), a working group of the Chamber of Digital Commerce, wrote in an appeal to the Financial Accounting Standards Board (FASB) two years ago.
Both the US-based FASB and the International Financial Reporting Standards (IFRS) Interpretations Committee of the International Accounting Standards Board (IASB), which has a little more clout in setting global standards, have been working on the problem.
Earlier this year, the IASB released a tentative agenda decision (TAD) on how to account for cryptocurrencies. According to the IASB, cryptocurrencies are a “nonmonetary asset without physical substance,” not cash holdings, and therefore must be accounted for in inventories or as intangible assets.
Tomei, Chamber of Digital Commerce: There was no certainty on how to do the accounting at the time we were trying to raise money.
A host of experts disagreed in comment letters to the IASB, arguing that to account for the likes of Bitcoin and Ethereum only in inventories or as intangibles will cause nothing but grief, while failing to provide greater transparency in financial reporting. For example, the Canadian Securities Administrators notes that under accounting for intangibles as in IAS 38, cryptocurrencies are carried at either cost or a revalued amount: “The cost model results in a historical measurement and does not provide current information. IAS 38 permits a revaluation approach when an active market exists, with revaluation changes (other than impairments) not being reflected in profit or loss. Consequently, even if it can be demonstrated an active market exists, profit and loss does not reflect the performance of the cryptocurrency asset.”
In the interests of completeness, the IASB needs to reconsider its definition of cash altogether, contends T. Paul Rowland, CFO and corporate secretary of Brane, a Canadian fintech focused on blockchain technology and digital asset custody, in a comment to IASB. “Bitcoin, the most popular cryptocurrency to date, was created precisely as a peer-to-peer version of electronic cash to permit direct payments from one party to another; that is, it was purposefully intended to act as a medium of exchange,” he wrote. “We suggest that the present IFRS standards provide an incomplete definition of cash, in that they do not define how sufficiently widespread the ‘medium of exchange’ must be to support the conclusion that a given asset constitutes ‘cash.’”
In an interview with Global Finance, Rowland further suggests that the IASB needs to reconsider whether volatility really matters “when you define whether or not something is considered cash or a cash equivalent.” Currently, IAS 7 provides that liquid investments are only considered cash if they are not subject to significant fluctuations in value.
Moreover, Rowland argues, one size does not fit all; the proper accounting treatment of a particular cryptocurrency may differ from company to company. “Cryptocurrencies have diverse properties depending on their use and underlying technology,” he adds. “There are almost 2,200 different types of cryptoassets out there, and it comes back to what the intent is. Some companies could argue that their holdings qualify as a commodity held for sale and therefore consider them inventory as opposed to a financial instrument, for example.”
The Accounting Standards Committee of Germany acknowledges the wide range of cryptoassets and their business uses, and that therefore the IASB’s assessment, “might not be appropriate under all facts and circumstances, nor might it make particular sense.” The German group also notes the evolving considerations of central banks and fiscal authorities around whether to view cryptocurrency as cash: “It would be unfortunate if those discussions led to a completely different result than what is being reasoned by accountants under the IFRS literature.”
Not Moving Fast Enough
The IASB has also been criticized for not moving fast enough. “The application of IAS 38 is already behind the application of blockchain technology,” Rowland warned the IASB. “By failing to provide more-appropriate guidance now, the profession risks not only falling further behind, but even worse, condoning financial statement presentation of cryptocurrencies and other cryptoassets that will, in all likelihood, not be considered ‘fair.’”
Business, meanwhile, is forging uncertainly ahead. Many retailers, both online and bricks-and-mortar, have stopped accepting cryptocurrencies because of their volatility. Others, like Whole Foods, are experimenting with new technologies aiming to provide easy use and back-end clearing. At the same time, Nasdaq has confirmed a partnership with State Street-backed Gemini, a cryptocurrency considered to be more stable because it is pegged to the US dollar.
In the absence of an international standard, issuers in some markets are also going their own way. Edward Haygarth, director of the Global IFRS Team at Grant Thornton International, noted to the IASB that 76% of Canadian issuers currently account for cryptocurrencies using the fair value through profit and loss rule. “It may be worth undertaking a review of IAS 38 ‘Intangible Assets’ in the future,” he wrote, “to take account of developments in the digital world since that standard was issued.” For example, “some entities that hold cryptocurrencies and do not act as broker-traders consider that the accounting outcome produced by the [TAD] does not adequately reflect the performance of their businesses.”
In the meantime, just finding an auditor is difficult for many issuers due to lack of guidance. “It was very difficult to find an audit firm to perform and issue audited reports that could be presented to investors,” says Bonnie Tomei, co-chair of the DAAC and former controller at Bitfury, one of the oldest and largest bitcoin miners. “It took a good eight months and about 14 different firms before we could find two accounting firms sophisticated enough to understand digital assets and willing to issue an audit opinion on the accounting of digital assets.”
Without immediate action by accounting-standards setters, Tomei warns, capital investment will slow.
Tomei would like to see standards bodies such as IRFS and FASB collaborate and set a task force to work with audit firms, the Chamber of Digital Commerce and a range of companies in the sector, including as speculators, coin miners and those accepting cryptocurrency as a form of trade. “The whole purpose of accounting guidance,” she says, “is to help comparability between company A and company B that hold the same or different cryptocurrencies and to ensure that investors or shareholders can understand the value of those cryptocurrencies.”
IASB’s TAD represents “a nice little tick forward,” she adds, “but we’re certainly not there yet.”