It’s almost a year already since I wrote about digital currency, mainly inspired by the publication Digital currency – A case for standard setting activity. A perspective by the Australian Accounting Standards Board (AASB).
I thought I’d return to the topic, simply because it seems to keep coming up. But there’s a practical problem – although the last year certainly generated plenty of new things to say about digital currencies themselves, it didn’t move things along much regarding the accounting issue. In a nutshell, most commentators conclude fair value measurement makes sense for investments in such currencies, and that movements in fair value during an accounting period are best recognized in profit or loss. The obvious reference point for such a treatment comes from the principles for recognizing and measuring financial assets set in IAS 39/IFRS 9. But as the Australian report summarized:
- The problem with applying the definition of a financial instrument to a digital currency is the requirement for there to be a contractual relationship. For example, if Entity A issued a bond to Entity B, Entity A has a contractual obligation to pay a specified amount of cash to Entity B. At the same time Entity B has a contractual right to receive a specified amount of cash from Entity A. It would therefore meet the definition of a financial instrument for both Entity A and Entity B.
- However, holding 1 unit of a digital currency does not give a contractual right or obligation to pay cash or another financial asset. Consequently, it fails the definition of a financial instrument.
The report concludes that digital currencies more comfortably fit the definition of an intangible asset: an “identifiable non-monetary asset without physical substance.” IAS 38 does allow measuring intangible assets using a revaluation model, where fair value can be “measured by reference to an active market.” But the standard clearly wasn’t written in anticipation of anything like digital currencies (its examples of intangible assets for which active markets may exist are “freely transferrable taxi licences, fishing licences or production quotas”). And any increases in the carrying amount of intangible assets from such a revaluation are generally recognized in other comprehensive income rather than net income.
Against this backdrop, the Australian report concluded the most appropriate course of action would be to address the issue by developing a new standard, while acknowledging that “developing an IFRS is a lengthy process and may take some time before a current problem is addressed.” The paper was discussed at the December 2016 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.” Given where we are now, this doesn’t seem like the most dynamic or far-sighted of conclusions.
Some might argue for the merits of a non-fair value based approach, on the basis that the fair value measurements are so volatile that any balance sheet making use of them will be out of date as soon as it’s issued. But a cost-based measurement approach would be even less relevant to anyone’s decision-making. Most practitioners will likely conclude (whether by analogy to financial instruments, or on the issue’s own merits) that any concerns about volatility are best addressed through comprehensive disclosure of valuation methodologies and of their attached risks and limitations.
It won’t be surprising if companies look for a way to apply an FVTPL approach to digital currencies without drawing too much attention to the gaps in the literature. The Canadian entity Goldmoney Inc. discloses that “short-term marketable securities held are for a short duration and include…Bitcoins.” The notes draw a distinction between such “short-term marketable securities” and “short-term investments,” specifying that the latter are financial assets, but not addressing the former. Ultimately though, “short-term marketable securities” are subsumed into “short term investments” on the face of the balance sheet, so that the distinction doesn’t lead to much difference. (The notes specify that all of short term investments, presumably including bitcoins, are classified in level 2 of the fair value measurement hierarchy, but they don’t provide all the disclosures set out by IFRS 13 for such measurements – for instance “a description of the valuation technique(s) and the inputs used in the fair value measurement.” This might just be a materiality-based omission though.)
“How long do you think it will take before cryptocurrency is a big enough deal that we need a bespoke solution?” asked a recent PWC blogger on the topic, presumably rhetorically. At the current time it’s hard to find many entities, in Canada at least, that disclose material holdings in digital currencies, although presumably the number will only rise. But the state of public discourse on the topic is often so chaotic and swooning that any injection of rationality might be disproportionately valuable. In the meantime, even if a company chooses to be somewhat vague about the derivation of its accounting policies, we can hope for clarity in other aspects of disclosure, including providing updated information in the notes or in the MD&A where the carrying amount at the end of the reporting period differs materially from the valuation at the time of approving the statements for issuance…
The opinions expressed are solely those of the author