What Makes Cryptocurrency Challenging For Accountants?

Posted on Wednesday, March 16, 2022 by Lydia SinclairNo comments

The world of accountancy recruitment in the future may look considerably different from its present, depending on the adoption and evolution of a range of different technologies that have the potential to change the face of financial investment and how to account for that.

One of the biggest challenges in this regard is blockchain assets, which take the form of both cryptocurrency and non-fungible tokens (NFTs), which blur the lines between several different types of financial asset in practice and have somewhat infamous volatility.

Whilst in the past many accountants have not encountered them in their work, with them becoming more used for transactions and countries such as El Salvador even adopting them as legal tender, it begs the question of how crypto should be managed on a balance sheet.

To even start with this question, it is important to know what cryptocurrency is, what it isn’t and what makes it so complicated to the financial world.


What Is Cryptocurrency?

Cryptocurrencies are digital tokens recorded on a widespread distributed ledger infrastructure that is not held in any one place, known as the blockchain. 

Whilst typically discussed as a token of exchange such as Bitcoin or Ethereum, cryptocurrency has a range of uses such as providing keys or rights to use services or as a representation of ownership, although in the case of NFTs this has itself caused problems and controversies.

Tokens are owned by an entity (sometimes called a wallet) that is represented by a cryptographic key that allows it to create entries in the ledger that would allow it to, for example, assign the tokens that it has control of to another key, which is the basis of transactions.

These transactions are verified and validated across many computers to ensure that the ledger cannot be altered, to avoid double-spending.


Is Cryptocurrency A Cash Equivalent?

Much of the discussion about cryptocurrency is as a replacement for fiat currency that could be used every day to buy tangible assets. It is seen as a cash equivalent by its supporters, in other words.

However, there are a lot of problems with defining crypto as cash as defined in IAS 7 and 32, but whether these are current problems with its relatively low adoption rate or a more fundamental infrastructural concern remains to be seen.

The issue is that to be defined as a cash equivalent it needs to be highly liquid and readily convertible to known amounts of cash, all of which cryptocurrencies cannot do.

Their liquidity is highly dependent on demand (usually in the form of gas fees and delays), they are not readily convertible to cash and that amount of cash is dependent on what is a highly volatile market.

Because of these gigantic variations in value, where a token could be worth significantly more or substantially less once the transaction is completed compared to when it started.

Instead, it is perhaps best defined as an intangible asset using IAS 38 to provide the definition, which holds that it is an identifiable asset that is non-monetary in nature and has no physical substance.

This means that they can be measured on balance sheets at either their cost value or revaluation value, depending on the accounting model being used.

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