Accountants have far been notable by their relative absence from that narrative. Perhaps most notably, the Australian Accounting Standards Board (AASB) and the Accounting Standards Board of Japan (ASBJ) have submitted, respectively, a discussion paper on “digital currencies” to the International Accounting Standards Board (IASB) and a paper for public comment on accounting for “virtual currencies”. In addition, the IASB discussed certain features of transactions involving digital currencies during its meeting in January 2018 and will discuss in future whether to commence a research project in this area.
Perspectives from the AASB
In December 2016, the AASB released the paper, Digital currency - A case for standard setting activity. The AASB examined the current IFRS literature and evaluated whether digital currencies should be accounted for as cash or cash equivalents, financial asset (other than cash), intangible assets, or inventories.
Key insights from the paper:
- At present, digital currencies should not be considered as cash or cash equivalents under IAS 7 Statement of Cash Flows. Specifically, it was commented that a digital currency lacks broad acceptance as a means of exchange (at present) and it is not issued by a central bank.
- In addition, a digital currency is not a financial instrument, as defined in IAS 32 Financial Instruments: Presentation, due to the lack of contractual relationship that results in a financial asset for one party and a financial liability for another.
- The paper found that a digital currency meets the definition of intangible assets, as defined in IAS 38 Intangible Assets, because a digital currency is an identifiable nonmonetary asset without physical substance.
- The AASB also notes that there is currently a lack of accounting guidance around intangible assets and commodities held for investment purposes.
The AASB concludes that there is a lack of guidance on digital currencies and that the measurement guidance under IAS 2 and IAS 38 does not provide relevant and useful information to users of financial statements (except for instances where an entity is considered to be a commodity broker-trader). It proposes that the digital currencies be accounted for at fair value with change in fair value recognized in profit or loss. Thus, standard setting activity is needed.
Exposure draft issued by the ASBJ
In December 2017, the ASBJ issued for public comment, the Exposure Draft, Practical Solutions on the Accounting for Virtual Currencies under the Payment Services Act. The public comment period ends in early February 2018.
Key insights from the Exposure Draft:
- The Exposure Draft states that a virtual currency dealer is required to recognize an asset when a virtual currency is deposited from the customer based on an agreement between the virtual currency dealer and the customer.
- Accounting for virtual currencies held by an entity on its own behalf, based on whether an active market exists for that virtual currency.
- A virtual currency dealer is also required to measure the liability recognized in relation the virtual currency held on behalf of its customers on the balance sheet at the same amount as the corresponding asset.
- Accordingly, no gain or loss should arise from virtual currencies held by a virtual currency dealer on behalf of its customers.
The nuanced, constantly evolving nature of the crypto-asset phenomenon, coupled with the lack of relevant formal accounting pronouncements, presents complex challenges for preparers of financial information. Underlying economic relationships must be understood in their substance, and the best fit found under existing accounting standards.
Dealing with crypto-asset accounting therefore requires detailed understanding of both distributed ledger technology and relevant accounting concepts. In the absences of further action by accounting standard setters, holders of crypto-assets may be unable to achieve the accounting treatment they consider most appropriate. We caution that each individual situation will require a unique approach, tailored with appropriate professional advice.