If it is to lead, rather than lag, the profession needs to get its head around virtual currencies.
Cryptocurrencies’ vulnerability to severe volatility has been laid painfully bare in recent months after the value of many of the major currencies was sent on a rollercoaster ride thanks, in part, to the actions of just one individual.
Multi-billionaire Telsa founder Elon Musk was behind the astronomical rise and subsequent fall of Bitcoin, the cryptocurrency he backed in February and then from which he subsequently withdrew his support last month. Mr Musk treated fellow crypto Dogecoin to a similar treatment in recent weeks.
The unpredictable behaviour of digital currencies as well-known as Bitcoin was difficult for investors to stomach, but also served as a reminder to accountants that nothing in the world of digital currency is straightforward.
The rising popularity of crypto assets has not yet been matched by a corresponding improvement in accounting regulation and guidance, making the market is something of a wild west for finance professionals.
However, that may be set to change. The UK Treasury has created a taskforce to investigate the potential for a Central Bank Digital Currency (CBDC) which will allow government to have some control over the use of crypto. The taskforce will also test how blockchain can improve financial market infrastructure in a safe, secure way.
If the CBDC were to go ahead, it would mean a new regulated and secure infrastructure within which consumers can buy and sell using digital coins, and consequently provide more stable ground from which accountants could operate.
Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, says: “A CBDC would be much easier to trace unlike cash which is attractive for tax evasion and money laundering. CBDCs are also seen as a way of removing costly low-value coins from the system by offering electronic change instead. Another benefit is that CBDCs could also ensure people have access to money if cash became in short supply in the future.”
Standards all at sea
Yet before the UK CBDC taskforce gets going, accountants remain at the mercy of a global regulatory system that lags behind the dash to digital.
For example, in the US, the generally accepted accounting principles (GAAP) regard cryptocurrency as an intangible asset to be recorded at cost and any fall in that asset must be recorded. This means the value can be reduced on a balance sheet over time which might not reflect the economic value if the cryptocurrency is held as an investment and rapidly appreciates in value. And it is clear that crypto does fall – and rise – incredibly quickly.
Moving from GAAP to IRS, PwC notes that accountants struggle with how to recognise, measure and disclose activities associated with the issuances of, and the investment in, the various types of cryptographic assets.
The global accountant says: “Since there are no accounting standards that specifically address cryptographic assets, one must look at the existing IFRS and apply a principles-based approach.”
However, as Table One shows, accounting for cryptocurrency assets does not fit easily within the IFRS framework.
A report from accountant Grant Thornton says: “Cryptocurrencies do not fit easily within IFRS’ financial reporting structure.”
Crypto not a cash equivalent
The accountant notes that accounting for holdings of cryptocurrencies at fair value through profit or loss may seem intuitive but is incompatible with the requirements of IFRS in most circumstances. The problem is that cryptocurrencies are not regarded as a currency for accounting purpose because they are not considered legal tender. Cryptos are not issued or backed by a government or state, and are not related to setting prices for goods and services. Nor do they meet the definition of a cash equivalent.
Grant Thornton says, typically, it will be more appropriate to account for cryptos in accordance with IAS 38 ‘intangible assets’ either at cost or at revaluation. The accountant adds that using the revaluation method depends on there being an active market for the cryptocurrency.
Further, using intangible asset accounting may be unsuitable because impairments and gains on sale may not be comparable.
Consequently, accountants may need to refer to the guidance set out in IAS 2 ‘Inventories’ for commodity broker traders.
Grant Thornton says that IAS 2’s default measurement recognises inventories at the lower of cost and net realisable value. However, the standard says commodity broker-traders are required to measure their inventories at fair value less costs to sell, with changes in fair value less costs to sell being recognised in profit or loss in the period of the change.
Grant Thornton says: “Our view is that this will only be appropriate in narrow circumstances where cryptocurrency assets are acquired by the reporting entity with the purpose of selling them in the near future and generating a profit from fluctuations in price or broker-traders’ margin.”
While all this makes life confusing for accountants attempting to navigate their way through crypto, Jeremy Blank, Deloitte lead client service partner, says there must be a significant rethink of how business and the accountancy profession manages cryptocurrency.
Mr Blank says: “Any sizable investment in digital assets presents more than just technical issues related to treasury, accounting, reporting, tax, and controls. It also involves a significant cultural realignment—internal and external—among the many different groups and departments, including the board of directors, the audit committee, risk, corporate reporting, finance, tax and internal audit.”
Accountants and the regulations that govern them are currently playing catch up to the rapid increase in cryptocurrency use among individuals and business. If it is to maintain its place, it imperative that the profession not only keep pace but find a critical place in this important digital revolution.
Table one: Account for holdings of cryptocurrencies under IFRS
|Standard||Categorisation||Acceptable under IFRS|
|IAS 7 Statement of Cash Flows||Cash and cash equivalents||No|
|No IAS 39 Financial Instruments: Recognition and Measurement||Financial asset at Fair Value Through Profit or Loss||No|
|No IAS 40 Investment Property||Investment property||No|
|No IAS 16 Property, Plant and Equipment||Property, plant and equipment||No|
|No IAS 38 Intangible Assets||Intangible assets||Yes|
|Yes IAS 2 Inventories||Inventories||Yes (under certain conditions)|
Source: Grant Thornton
Gill Wadsworth is AAT Comment’s news writer.