IFRS VS GAAP Viewpoint
More and more businesses are accepting cryptocurrencies, (Cryptocurrency will be impacting the future of business, Mike 2021) including Stable coins, as a means of payment alongside more traditional methods such as cash and credit cards. Proper accounting for these businesses in GAAP monetary statements is an emerging area as this glide continues.
The Financial Accounting Standards Board (FASB) is the Internal Revenue Service of the accounting world. The Financial Accounting Standards Board creates generally accepted accounting principles (GAAP). As we speak, there are no cryptocurrency-specific GAAP rules yet.
In the absence of these crypto-specific rules established by the FASB, a task force formed by the American Institute of Certified Public Accountants recently created a guide for digital asset professionals that looks at how cryptocurrencies are classified in GAAP financial statements, particularly on the balance sheet.
In case you are not an accountant, a company’s balance sheet shows its financial position at a specific time. Here the company lists its fixed assets (land, equipment, cash, etc.) and liabilities (loans, liabilities with third parties, etc.), and equity (composition of the property). The balance sheet report reflects the financial picture of the company and therefore has a direct impact on the valuation of the company.
How Cryptocurrencies Rank In Financial Stocks
According to the white paper published by the American Institute of Certified Public Accountants (AICPA), crypto-assets cannot be classified as cash or cash equivalents in GAAP financial statements because they are not backed by a sovereign government or are legal tender. We cannot classify them as financial instruments or financial assets because they are not cash and do not constitute a contractual right to receive cash or any other financial instrument, they say. Since cryptocurrencies are immaterial or intangible, they do not clearly meet the definition of inventory and also cannot be marked as inventory on the balance sheet.
Cryptocurrency Classified As Being An Intangible Asset
As explained above after the elimination process, we are left with a single category to classify cryptocurrencies into intangible assets with indefinite useful lives, just as companies currently classify crypto assets in GAAP financial data.
There are some issues with categorizing cryptocurrencies being intangible assets with an indefinite useful life. In practice, this accounting treatment does not correspond to reality; Cryptocurrencies such as Bitcoin work much like cash since they are liquid. The purpose of GAAP financial statements is to provide an accurate and fair picture of the underlying company’s financial condition. By treating crypto assets as intangible assets, GAAP finance cannot communicate the high liquidity of crypto assets.
Second, an item that has been classified as an intangible asset with an indefinite useful life must be tested for impairment. This means that if the value of the crypto asset has decreased at the end of the reporting period, the business can write off this amount as impairment (not to be confused with tax losses) in the income statement. However, if the value rises again (which is quite common due to high volatility), the business will not be able to appreciate the value of the asset.
As a result, current GAAP accounting practices are nothing more than an understatement of crypto assets and forbid the business from disclosing the true value of the crypto assets it owns in its financial statements.
It should be noted that most small businesses are not required to produce financial statements that are in accordance with GAAP standards. These companies use tax billing methods to prepare statements (financial statements), which frequently present flexibility in classifying crypto assets.
Cryptocurrencies Are Growing Fast
The best-known subgroups of cryptographic assets are cryptocurrencies that are mainly used to exchange and share some characteristics with conventional currencies! The markets are growing rapidly, but right now, Bitcoin and Ether are two of the most popular cryptocurrencies.
These transformative technologies have not gone unnoticed by standard setters. As part of the process, the Accounting Standards Advisory Forum (ASAF), an IFRS Foundation advisory forum comprised of representatives of national and supranational accounting standard setters, discussed the digital currency classification of a crypto asset at a meeting in December 2016. Discussions continued in various accounting standards bodies, but the IASB has not issued any formal guidance at this time.
At the Board meeting in July 2018, the IASB agreed to ask the IFRS Interpretations Committee (IFRS IC) to consider accounting guidelines for cryptocurrency transactions, possibly as an agenda decision on how an entity should comply with the requirements of existing IFRS.
In June 2019, the IFRS IC published its agenda decision on Cryptocurrency Holdings and it is considered to be a subset of crypto assets with the following characteristics:
1. A virtual currency registered on a dispersed ledger that employs cryptography for security reasons.
2. Crypto not offered by other parties or a competent authority!
3. There is no contract between the holder and another party!
Many judgments require further investigation as companies determine the accounting policies to use and as technologies and markets evolve.
Crypto Assets Held By An Entity
IFRS does not provide specific guidelines for accounting for crypto-assets and there is no clear industry practice that accounting for crypto assets can fall within a variety of different standards.
The entity’s purpose of holding crypto assets must also be considered when determining the accounting model. Next, we examine accounting standards and other considerations that might apply to subsets of crypto assets.
Cash Or Currency
IFRS does not contain an explicit definition of the terms cash or currency. It could be argued that the words cash and currency are interchangeable for accounting purposes.
Therefore, an evaluation is needed to determine whether cryptocurrencies can be cash or a currency.
According to IFRS, Cryptocurrencies lack some of the common characteristics of cash and coins, in particular:
Cryptocurrencies are not legal tender and are mostly not issued or endorsed by any government or state!
Currently, cryptocurrencies cannot set prices for goods and services directly. In other words, cryptocurrencies can be accepted to process some transactions, but they are not directly related to the pricing of goods or services in an economy.
The IFRS assessment must take into account the facts and circumstances of each cryptocurrency.
IFRS: We note that Venezuela has recently adopted a government-sponsored cryptocurrency; Companies that own shares in this cryptocurrency may need to assess whether they meet the definition of cash or currency considering the factors described above, as well as any relevant legal and regulatory questions about its validity.
The Acceptance And Penetration Of Cryptocurrencies
(The future of cryptocurrency is strong, n.d); since the introduction of cryptocurrencies with the invention of Bitcoin, citizens have found a real use case for these currencies. While it was used to trade illegal goods on the dark web in the early days, it has gradually been respected in various mainstream legal industries. Many articles have been written about the technical aspects of cryptocurrencies, including the protocol, privacy, or network architecture of a cryptocurrency.
In connection with this article, economic aspects such as market equilibria, market intermediaries, or the status of Bitcoin as a form of money have also been intensively investigated and explained through various studies.
There is little to no research that fully defines the factors that discourage the adoption of cryptocurrencies, or that examines aspects of Bitcoin’s materiality, its social life, and the perception of legitimacy among citizens and governments. Cryptocurrencies like Bitcoin, which are based on blockchain technology, have similar or even improved characteristics to fiat currencies, including superior marketability, scarcity, durability, and portability, which facilitate exchanges.
It led to a fundamental change in monetary technology due to general dissatisfaction and long-damaged trust in the banking system, which has become a powerful catalyst for this need for alternative and innovative concepts for future monetary systems.
The age of the internet has created the need for cheap, anonymous, and rapidly changing transactions for online exchange and thus fast payment processing has emerged. For the most part, electronic money has fulfilled this role, but in recent years new types of money have emerged that are driving such significant change.
A significant change occurs when there are growing criticisms, such as doubts about the correctness or power of the current banking system. Today, however, money is already invented; a new currency has to compete with an established monetary system. We can describe this situation with Metcalf’s law, in which the utility of using a network increases with the number of network participants; therefore, cryptocurrencies can be designed as a decentralized monetary network with relatively few users so far.
The definition of the problem in this document is to understand the slow growth and use of cryptocurrencies in today’s economy. A recent global study from the University of Cambridge found that there were only plus 3 million cryptocurrency users and 11.5 million digital wallets storing cryptocurrencies in the first quarter of 2017. This would mean that only 0.04 percent of the population Worldwide has actively used cryptocurrencies as a store of value or medium of exchange.
A representative study of 1,009 German Bitkom citizens found that in 2018 64 percent of the German population was aware of Bitcoin, compared to 36 percent in 2016 and only 14 percent in 2013. 19 percent of participants said they will employ Bitcoin in the future out of curiosity (53 percent), dissatisfaction with the central bank’s monetary system (37 percent), or online payments (31 percent).
However, although only 4 percent of the entire study group currently owns it, the majority (72 percent) said they are not interested in using Bitcoin in the short term, so only 3 percent believe that cash digital is part of modern society. From a retailer’s perspective, acceptance of crypto payments is currently at 2 percent, and European retailers have a significant interest in accepting payments in the future. While Bitcoin and other cryptocurrencies have been around since 2009 and certainly have several advantages, market penetration is still very low.
Factors That Make Cryptocurrency A Revolution
A crucial factor that is revolutionizing blockchain technology is the creation and transfer of digital money. The history of money and a more detailed analysis show that each historical currency was supported by a central authority that guarantees the financial value or worth and therefore delivers value to its users. Cryptocurrencies and Blockchain technology are making the broker’s business model outdated, making it difficult to cheat on transactions and therefore diminishing the value of credibility conferred by trusted intermediaries.
The standard on how people store and exchange coins through a trusted third party have existed since the creation of the coins. For the lovely cryptocurrencies to attain mass acceptance, regulatory process and trust in the value of Cryptocurrencies will most likely be required, but this runs counter to the concept of popular cryptocurrencies such as Bitcoin operating on a decentralized and unregulated blockchain network.
Legal Aspects Of The Recognition Of Cryptocurrencies
Virtual currencies must take into account diverse legal elements depending on the country. Some Countries classify cryptocurrencies as cash and legal, others classify them as active and legal, while some nations like India do not classify them as illegal or legal without a legal framework. Bitcoin is released illegally in countries like Bangladesh and Russia, its status is complex in other nations.
They ban cryptocurrencies in some countries due to existing laws, such as Iceland. However, as in many other countries, cryptocurrencies in India currently have no legal framework and are not regulated. The legal issues related to cryptocurrencies are as follows;
Decentralized nature: unlike government-issued currencies (i.e. coins, banknotes, etc.), these are under the control of the constituted authority and get their value from the promise of the authority. Cryptocurrencies are inherently decentralized, making it difficult for the government to regulate them.
Lack of strong legal framework: Most countries of the world lack a strong or proper legal framework to adjust the flow and flow of virtual currencies (VC) both within and outside the nation, which creates additional obstacles to regulating a decentralized currency.
The volatility of virtual currencies: As can be seen from the recent changes in the value of the most prestigious cryptocurrency Bitcoin, which had a base value of $ 0.30 in 2010 and rose to almost $34,000. As we speak, virtual currencies are on a course Volatile up and down movements that drive the market and further increase economic instability.
Independent wallets: wallets that contain cryptocurrencies and are involved in transactions are set up and managed by private companies that have no control over an organization due to the lack of binding international laws. Therefore, they are not responsible for the loss of customer valuables and any form of financial crime that is committed through the use of these wallets. It would have been best if governments carried out the Cryptocurrencies legislation on time, (Cryptocurrency legislation isn’t a priority for lawmakers, Sean, 2020)
Taxes: The issue of taxes is one of the most important problems that cryptocurrencies face. Due to their pseudo-anonymity, if used correctly, they can easily be used to conceal property for tax evasion. Cryptocurrencies are frequently classified as taxable assets, for instance, in the US, bringing significant amounts of foreign currency into the country can destabilize its economy and create fiscal problems, but it also creates volatility in financial markets.
The online route to carry and store cryptocurrencies facilitates their passage through border checkpoints where they can be withdrawn if they are within the country, efficiently avoiding border taxes. The loopholes that exist in the legal and tax system in some countries allow a person to use cryptocurrency features such as anonymity and the lack of outdated or incorrectly applied cryptocurrency systems.
Money Laundering: Money laundering is generally considered when developing a country’s legal framework when talking about cryptocurrencies. But since its inception, many countries have struggled with money laundering problems through cryptocurrencies. Due to the ease with which they move between nations with little or no supervision, money laundering is one of the main legal complications with such currencies.
While organizations can monitor virtual currency bought through banks, it becomes difficult to buy or sell the currencies using money or other techniques that are difficult to track.
Cryptocurrencies mean different things to different people
For some, cryptocurrency is an investment, for others, it is property, and some may even say it is a commodity. This has contributed to how cryptocurrency holdings should be accounted for.
This issue has been raised with the IFRS Interpretations Committee (IFRIC) and some will be surprised by the conclusion they have reached as mentioned earlier.
Cryptocurrency Is The Convenience Of Electronic Transactions
The idea of cryptocurrency is to combine the functions of fiat money with the convenience of electronic transactions. The cryptocurrency retains some of the characteristics of fiat money while allowing the benefits of an instant transaction. It works similarly to traditional payment methods and allows users to make payments for a wide variety of products and services.
Cryptocurrencies, such as Bitcoin, can make payments for goods and services at Bitcoin merchants such as Wikipedia, Microsoft, Amazon, so the cryptocurrency is used as a medium of exchange to facilitate transactions.
The cryptocurrency fulfills the function of a unit of account when the currency is accepted by users. Although the cryptocurrency meets the requirements of the unit of account, the ability of the cryptocurrency to constantly value goods and services based on their price fluctuations remains controversial.
About 10 years after the cryptocurrency was launched, economic players are acquiring it not only to pay for online transactions but also to invest in them for future capital gains. An empirical study of Bitcoin users shows that users keep their cryptocurrency as an asset in the hope that it will store something of value for the future rather than use it as currency.
It was also found that cryptocurrency accounting treatments can diversify investors’ portfolios. Therefore, cryptocurrency fulfills the second function of fiat money, namely, store of value.
Respond To Institutional Pressures
As the use of cryptocurrencies increases, organizations must respond to institutional pressures by incorporating them into their operations to meet the expectations and requirements of the public. We also knew this as coercive isomorphism. As mentioned in the piece, well-known companies such as Microsoft, Wikipedia, and Amazon accept digital currencies for payment.
We believe it will encourage smaller organizations to practice using cryptocurrencies to comply with social norms. In such circumstances, we cannot deny that governance structures such as professional accountants must follow the rules. Accounting professionals need to meet the challenges that cryptocurrencies pose in the business environment. Therefore, accountants must understand the underlying factors that affect the accounting treatment of cryptocurrencies.
Therefore, accounting professionals must understand the social situation of cryptocurrency. We formed social units based on the perceptions and actions of individuals in society. So the IFRS must understand the social details of cryptocurrencies’ situation.
We could describe a crypto asset as a currency or token. The difference is based on the functionality of the asset, but the terms can be used interchangeably as there is no generally accepted definition for either. Currently, the term currency generally refers to a cryptographic asset that has the express purpose of acting solely as a medium of exchange, while the term token refers to an asset that provides additional functionality or utility to the holder.
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