Mind the GAAP (part 1)

This blog will provide information and opinions on matters of interest to corporate entities on the treatment of blockchains and digital currencies for accounting, tax, audit and regulatory purposes.

It has been 10 years since Bitcoin and blockchain came into existence. In the last few years, the new technology is being equally implemented by large corporates and many SMEs who engage in R&D, mining, investing, trading and fund-raising activities. As of early February 2018, there were more than 1500 cryptocurrencies, 8500 markets and market capitalisation in the range of 500 billion. ICOs are under scrutiny by the regulators in developed countries who have no agreed mutual approach on accounting treatment.

It is not a wonder that no accounting standard for the cryptocurrencies (coins or tokens) has been adopted by any national standard setter. Accountants are conservative by default and it is ironic that many audit and accounting firms have pledged to adopt blockchain as technology but have not pushed for adoption of accounting standard for treatment of digital currencies. In the last 12 months the topic has slowly come to the attention of IASB, FASB, CASB, AASB, ASBJ – these are the standard setters for the developed markets who set the tone in the profession. Interestingly, FRC has done no research on accounting, they and Treasury were more interested to deal with the taxation. A credit should be given to the US Chamber of Digital Commerce who did a research paper and requested FASB to put the item on their agenda. Not that this has happened as of today. All national bodies have not been able to reach a uniform conclusion on the matter of accounting treatment which covers classification, recognition, measurement, subsequent measurement, presentation and disclosure. No GAAP has been able to grandfather in its rules the emerged cryptocurrencies. Companies in the business with digital currencies have adopted their own accounting policies but they are inconsistent and this impedes comparison, a vital feature for investors and analysts who require understandable, relevant and reliable information for decision making.

Blockchain – a matter of control


Surprisingly, the focus of the commentators and research writers has been on the accounting for cryptocurrencies and little has been mentioned about the technology underpinning these currencies. Blockchain can be compared to a distributed database of records of transactions called blocks which are linked and secured using cryptography.

As with any database its cost can be measured and benefits expected to flow to the creator, however by its original design a blockchain purpose is to avoid control and therefore trust over its use. The lack of control over the blockchain will preclude entities to recognize it as an asset on their balance sheet. There could be a few exceptions though – a company can develop or commission the development of a private, permissioned blockchain for its own internal business use. Such a private distributed ledger will be independent of the public system and the entity will have full control over its use and benefits. If the ledger is developed internally the costs would be expensed as R&D costs because all major GAAP prohibit the recognition of internally generated intangible assets. However, if the entity commissioned such a blockchain from outside developers then it will be acquired externally and provided all recognition criteria are met we may be lucky to see such an asset on the face of the balance sheet.

In the next blog we will analyse the accounting options for cryptocurrencies and propose temporary solutions.