Episode 17: Cryptocurrencies
welcome to PWC ifess talks your source
of all things if technical accounting
matters business issues current standard
setting and Regulatory updates I’m your
host Ruth predy in today’s episode we’re
going to be talking about something very
exciting
which is the new world of
cryptocurrencies and really talking
about what the debits and credits are
now this is obviously a new and
expanding area so we’re just really
starting to think about what we might do
with our debits and credits today and
this definitely isn’t our final view but
we’re joined today by Gary berkovitz
who’s going to give us his thoughts on
cryptocurrencies welcome Gary thanks
very much Ruth hi everyone okay so you
were almost expecting them to say hi
back then weren’t you they can’t back to
us it’s sad times right
okay okay so what was let’s start with
the basics what is a
cryptocurrency okay that’s a great
question so obviously we’re accountants
and this is about the accounting so I
could probably try and convince everyone
I knew what I was talking about in
detail about cryptocurrencies but uh try
and keep that brief I think in its
simplest form a cryptocurrency is really
just a medium of exchange like uh like
the US dollar so if you want to exchange
something with someone you’ll use a
cryptocurrency and then they’ll give you
other goods and services
okay so I’ve heard Bitcoin all the time
is it just Bitcoin no so Bitcoin is one
of the cryptocurrencies out there and
then if you want to get even more
technical cryptocurrencies then based on
that blockchain technology and that’s
about as much as I know about blockchain
so again it’s you know it’s a form of of
of Ledger which tells people you know
what they own and what other people own
um but as to answer your question no
Bitcoin is just one of the
cryptocurrencies we have there are other
cooler funkier names out there like um
ethereum or maybe some folks have heard
of Ripple or Litecoin um I’m waiting for
if for S coin to come out then maybe
we’ll all invest but uh yeah it’s just
they’re all they’re all types of
cryptocurrencies okay so in my basic uh
mind rather than having money in a bit
of paper I basically got some sort of
digital currency yeah yeah so um so like
the US dollar a cryptocurrency has no no
intrinsic value so it’s not like you can
exchange it for another commodity like
just just like a US dollar but there are
some very important differences um and I
think it’s important to understand them
because it it makes a difference in the
accounting between a a cryptocurrency
like Bitcoin and a US dollar and and
those are for example um a
cryptocurrency has no physical form so I
can you know get my dollars and you know
show everyone and impress them with my
dollars I can’t do that with a
cryptocurrency because it’s only digital
it only exists um online it’s also
another very important thing it’s not
legal tender so I can’t you know it’s
not backed by any government Authority
it’s kind of created in the air so
that’s also very important and and as
part of that it’s it’s not um its Supply
isn’t determined by a central bank um
and all the transactions are actually uh
entered into and validated by the users
on the system rather than a central
repository like a bank or an
intermediary that’s that’s actually the
key economic rational behind it is that
you you you take out the middle man and
therefore for it’s adds trust and and
and value to to the transactions so
those are those are the important things
and then also the cool bit of crypto in
cryptocurrency the the reason that is
because it’s obviously all um in crypted
online and uh you know that’s about as
much as I know it’s just just means it’s
very safe yeah okay I love how you said
the cool like we I feel like we’re cool
accountants talking about this today the
cool bit is all around the crypto okay
so that’s really useful that’s giving us
some characteristics of why
cryptocurrencies are different from say
just the US dollar why why do I even
care why do I care about it
why should I care why should you care
because I mean well as as you know the
the latest and greatest things is a lot
of people are actually investing or
buying into these crypto currencies I
said Bitcoin is probably most of us have
heard of Bitcoin so a lot of people have
bought into Bitcoin companies are buying
into Bitcoin and I think the reason we
need a care is its popularity seems to
only be growing over time and these
assets values are actually becoming
quite significant to potential balance
sheets of what could potentially be our
clients and so why you should care other
than potentially invest investing and
making an absolute killing like a lot of
people have done um is that the
accounting is probably going to become
more important as these cryptocurrencies
like Bitcoin and others become uh more
popular and potentially get onto the
balance sheets of many of our clients I
can’t even afford one coin I don’t but
anyway neither can I just to be clear I
think neither I nor Ruth are currently
invested in Bitcoin we not we’re not
punching the any any other any other
cryptocurrency yeah that’s right um Okay
so we now know what it is obviously the
key thing we care about on this is IFRS
and accounting so how do what accounting
standard does cryptocurrency fall into
yeah so this is where folks might be
slightly surprised and or shocked so I
think at the moment folks would probably
say that a cryptocurrency if you’re
going to try and put it into a standard
is most likely going to fall into is2
standard on inventory or more likely
into is38 our standard on intangible
assets okay that yeah I wasn’t expecting
you to that I was expecting you to say
it was a financial asset to be honest
why isn’t it a financial asset and that
is you know you wouldn’t be a lone with
that’s generally we most supposed to
gravitate to this feels like currency
and so my shocked face yeah okay yeah
cuz I was waiting for the but obviously
for those who can’t see ruther’s got her
shocked face on but uh yeah the reason
why unfortunately it doesn’t get into
our financial asset accounting is
because to get into financial asset
accounting you need to either have
something that is cash and unfortunately
to be cash you need to be legal tender
and remember when I was explaining about
the characteristics it’s not legal
tender so unfortunately you fail that
important part of the definition the
second bit is it’s it’s not a cash
equivalent because to be a cash
equivalent um your the value in the
underlying shouldn’t be exposed to
significant fair value changes I think
anyone who knows anything about Bitcoin
knows that these things are exposed to
significant fair value changes so
unfortunately it it fails to meet the
definition of a cash equivalent and the
last bit of definition is to be a
financial asset it needs to evidence a a
contractual right to receive either cash
or another Financial instrumental cash
equivalent and unfortunately it fails
that part of the definition as well and
because you fail those three pieces of
the definition unfortunately you fall
out of the financial instruments
guidance which means we can’t account
for it um in the scope of that standard
so trying to like hunt around within the
big ey FR book we found that it sort of
meets the definition of either inventory
or in tangible so if today I’m looking
at the standards how am I accounting for
that then yeah so unfortunately then if
we fall into kind of uh inventory or
intangibles the base measure there is
cost so if you’re in inventory you’ll
measure at cost and that’s it if you
fall into intangibles initial
measurements is at cost as well and then
most folks subsequent measurement
default is to cost but remember there is
that little bit in in N is 38 un
tangible standard that says look if
there’s an active market for the
intangible asset very rare cases where
it’s observable what its value is you
have an option to measure it after
initial recognition at at fair value um
I think to date the only thing we
thought there was an active market for
used to be think cab
licenses milk examp but I think if ever
there was a there was a you know an item
that might actually get through the
hurdle of saying there’s an observable
market for this it would it would most
likely be something like a Bitcoin which
is is actively traded is is only getting
more popular so you might be able to
argue maybe that you can measure these
things at fair value but unfortunately
that’s kind of second prize because even
if you do measure it at fair value the
changes in that fair value will have to
go through through the comprehensive
income through oi not in profit and loss
and they won’t be recycled when you
actually realize the value in in the
underlying um in the underlying Bitcoin
so you can kind of get the balance sheet
right maybe if you’re in the intangible
assets but your your income statement is
is not going to look right at least in
my in my view yeah so just on that point
it does feel like if you said to anyone
that like vely was accounting not living
deep into the standard you think it’s
financial asset and makes sense to be
fair value and really if they said if
you said it was inventory I don’t think
people would believe you but I’m pleased
that’s where we are today so what is the
right answer that doesn’t feel right yes
so I’m glad you’ve asked that because
clearly all the right answers should be
coming to me Ruth that’s good good good
that you’re you’re basing your trust in
me now I don’t think there is a right or
wrong answer but I think you’re right if
you if you were to ask the the common
man/ common accountant uh if who still
have common sense on people doubt that
there many of us out there anymore but I
like to think there are I think most
folks would gravitate to say this thing
feels a heck of a lot like some kind of
financial asset that should be measured
at fair value it’s very volatile at the
moment it’s being used I think is
something people are trading in just
like a normal investment and making
short short-term gains on on buying and
selling this item it feels like its
subsequent measurement should be fair
value through profit and loss yeah and
so
obviously that isn’t what people are
doing at the moment so it feels like
something maybe the board should address
what are the board doing is there a
project on it so last I checked there
was no project on it and I don’t think
the board currently has has the appetite
or maybe the band withth to take it on
so at the moment there are no current
plans for either the board or the
interpretations committee to to to look
at it um I think what will be very
interesting is you know as as the
popularity increases which it does seem
to be on the rise not just of Bitcoin
but other cryptocurrencies if they start
being used as the normal way in which
people transact uh online to buy and
sell goods online I think there’s going
to come a time when when we’re going to
need to answer the question yeah so the
board might be getting some letters
soonish if it really picks up even more
Pace okay perfect So currently no board
project um so if I’m a company today and
I’ve got bit Bitcoin what should I be
doing you should probably be jumping for
joy because the value went up I think
about 700% in the last year um but uh I
think I should probably then throw again
neither Ruth nor I have nor are we
advocating you know the purchase of
sales of of Bitcoins but I think from an
accounting perspective what you should
do I think there’s there’s maybe you
know we always say disclosure is a
crutch that that shouldn’t be used when
recognition and measurement doesn’t work
but I think in this case that’s probably
the best you have at the moment so to
the extent that you caught by either
measuring the stuff at Cost um either
cost all the way through or revalued but
putting the the gains through oci as we
mentioned I think the next best thing
you’ve probably got is just to disclose
at least what the fair value of these
items are to the extent they are
material and then someone can see okay
this was the amount that went through o
if it’s at Cost this is its actual
observable price there’s nothing
prohibiting or stopping you from saying
these are the items that cost but by the
way based on the latest exchange on this
day this was the value of a Bitcoin to
give someone a user at least the the
tools they need if they would like to
converted into something at fair value
through profit and loss brilliant so
perfect parting tip there I think you
know if you’re listening to this and the
board hasn’t got a project and it does
it feels like in today’s accounting uh
cryptocurrency either fits into
inventory or in tangibles which maybe we
don’t see is such a logical accounting
key thing is really transparent
disclosure of what you’ve got is it
material and then if it’s material you
know lots of stuff to tell us what’s
going on there with the Bal so thank you
so much for joining us today Gary it
feels like a very exciting topic to
discuss cryptocurrencies and how to
account for it um thank you everyone for
um joining in if you would like to find
out more information we’ve got lots on
our website as usual so that’s pwc.com
IFRS um thank you for listening I’m your
host Ruth priy happy
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