Here’s the executive summary:
- In our opinion there is a lack of clear guidance in IFRSs and, as a consequence, digital currencies could be accounted for under IAS 2 Inventory or IAS 38 Intangible Assets depending on certain facts and circumstances. We do not think that the measurement guidance in IAS 2 and IAS 38 provides relevant information to users of financial statements in the context of digital currencies. We think that digital currencies should be measured at fair value with changes in fair value recognized in profit or loss. Furthermore, we think that the accounting for digital currencies highlights a broader issue with IFRSs in that there is no accounting standard that deals with investments in intangible assets or other commodity type assets that are not financial instruments or inventory. Consequently, we recommend that the IASB develop a standard that would address the accounting for investments in intangible assets and commodities.
The paper also concisely sums up some of the main characteristics of Bitcoin and other digital currencies:
- …a digital currency is not backed by a physical commodity nor does it exist in physical form. It is also not linked to any physical currencies either although digital currencies are often quoted on an exchange against other currencies like US dollar. Like fiat money its value is derived from the relationship between supply and demand. If we take Bitcoins as an example, scarcity was introduced by limiting the number of bitcoins that could ever exist to 21 million. However, unlike fiat money, digital currencies are not backed by a government, central authority or legal entity…Why is backing by a government or some sort of central authority so important? Because fiat money is not linked to a physical commodity it is easy for it to become worthless if people lose faith in that currency as a medium to serve as a storage facility for purchase power. “Money’s” purchase power is directly affected by how a country governs itself and the state of its economy.
I’d only really thought about this issue once before, where as I recounted here, the thought came up in passing of broadening the definition of cash to reflect new methods of payment. The AASB paper also concludes that the current concept of cash doesn’t seem to encompass such items. IAS 32 says: “Currency (cash) is a financial asset because it represents the medium of exchange and is therefore the basis on which all transactions are measured and recognised in financial statements.” The paper notes that since “in the context of global trading, only a small number of entities currently accept digital currency as a means of payment” and since “nobody seems to recognize digital currency as legal tender (yet),” it’s difficult at the present time to regard these new currencies as falling within the dominant “medium of exchange”. They also don’t appear to fall into the definition of cash equivalents – “short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value,” and don’t appear to meet the broader definition of a financial instrument in that they don’t represent “a contractual right or obligation to pay cash or another financial asset.”
It may not be urgent to resolve the issue given the low incidence of digital currencies, but it’ll presumably become more prominent over time. Stepping back, it might at some point generate a broader question about the preeminent status in the statements of cash, and the whole “follow the cash/cash is king” mentality. This mentality already took a bit of a knock a few years ago during the asset-backed security crisis, when some entities took the previously unimaginable step of recording a credit loss on items they’d classified as cash equivalents. Maybe the right corrective step though isn’t to worry about preserving the purity of the cash concept, but rather to evolve to a more fluid, layered notion of an entity’s core assets and of the value they represent.
That train of thought might lead eventually to a form of current cost accounting, which I previously wrote about here. There’s not much of a constituency for such mechanisms, given the illusory comfort of living in a low-interest rate, low-inflation environment; and the bumpy past experience with the concepts. But these economic attributes presumably won’t last forever. And as I wrote in that previous article: “(past efforts in this area) didn’t accomplish much, but then they seem to have been rather haphazard, falling far short of yielding relevant, reliable, comparable information from one entity to the next: any future initiatives would presumably be more rigorous. It’s not hard to intuitively grasp how profit or loss computed under current rules might become meaningless for some entities in a higher-inflation environment, where pricing determinations, replacement costs and the like are on a perpetual wild ride. Of course, if that happens, we’ll probably have much bigger problems than financial reporting ones, so let’s hope the low prominence of this area remains justified.”
Anyway, the AASB paper was subsequently discussed at the December meeting of the Accounting Standards Advisory Form, where the ultimate suggestion (given in particular that the topic continues to be “in its infancy”) was that the IASB should “continue to monitor developments in this area.” So we’ll have to wait and see…
The opinions expressed are solely those of the author