• ‘Accointing’ for cryptocurrencies



    The rise of the coins

    Last year, we witnessed an unparalleled surge in cryptocurrencies in terms of both monetary value and interest fanfare. In December 2017, the total market capitalization of these digital assets reached $370 billion, which surpassed the value of the US’ largest bank, JPMorgan, at $369 billion, according to CoinMarketCap.

    About one-third of the said market value is attributed to Bitcoin, the most known cryptocurrency. It is recognized as the pioneer cryptocurrency that started in 2009 through a whitepaper published by a Japanese national that brought it to life, or rather, to online existence. In today’s exchange, one Bitcoin is already equivalent to half a million, or almost P540,000. Google likewise reported record highs in terms of searches for Bitcoin, which, in certain months averaged 10 million, compared with 1 million in 2016. At one point, online queries for Bitcoin even overtook the total number of search hits for US President Donald Trump.

    Usage of these coins widely varies, with more than 850 cryptocurrencies presently circulating and traded worldwide. A substantial number of investors are speculative traders, who are only waiting for the right and opportune moment to cash in. But there also institutional users, who use these currencies as a means of exchange to facilitate a transaction under blockchain technology.

    Another growing trend last year was the Initial Coin Offering (ICO), where cryptocurrencies were the means of raising funds to finance a project or business venture that might either be already operational or still a concept described in a blueprint or white paper.

    Amid the popularity and staggering figures mentioned above, there seems to be only a few companies, if there is any at all, that publicized and announced significant gains or income from the coins. Moreover, these digital currencies remain elusive from financial statements, which begs the question of whether there is actual and legitimate value to these currencies, or it is only a figment of one’s imagination in the digital realm.

    Bridging the GAAP

    While accounting relies heavily on a centralized method or system of keeping tabs with relevant transactions, cryptocurrencies operate in a decentralized environment, unchained by any laws and regulations. As it stands now, cryptocurrencies fall outside the purview of any existing financial accounting or reporting framework, including International Financial Reporting Standards (IFRS) and US Generally Accepted Accounting Principles (GAAP).

    Accounting projects or exposure drafts to define its financial concept, principles and boundaries are still not in progress. Coins remain only a subject of chatter and online deliberations through podcasts and blogs.

    Accordingly, there is great room for flexibility in recognizing and recording the virtual coins in the accounting books, and we are trying to explore the varying options.

    Currently, the term cryptocurrency implies that it is a financial asset that should be accounted for as a financial instrument with the closest semblance to cash or cash equivalent. Coins, in fact, are used when buying goods and services in commercial establishments, such as restaurants and car dealers. In November 2017, PwC even announced that it has accepted its first payment in bitcoin for an advisory engagement. However, cryptocurrency fell short of the preconditions to be recognized as a financial asset. To quickly digest:

    To be considered as cash, currencies are required to be of legal tender that is duly acknowledged by regulatory
    bodies, such as Central Banks and other financial institutions. Coins fail to meet this criterion if no known government institution bestows legal persona upon it, or bans its presence in other jurisdictions (e.g., China).

    In addition, financial instruments, particularly assets, are recognized when there is a contractual right to receive cash or other financial assets. Cryptocurrency does not bind parties to any formal arrangement; hence, any commitment may remain as an unfulfilled promise.

    As an inventory, a digital coin or token will be measured at the lower of cost, or net realizable value, which may not be reflective of its inherent nature and susceptibility to market factors. Cryptocurrencies have no physical existence and are only electronically stored in the blockchain. Coins cannot be tied to historical cost, given active market exchanges that tend to dramatically pull up and down its value on a daily basis.

    Another plausible option is accounting for cryptocurrencies as intangible assets, where the related accounting standard permits the measurement at fair value, with any reported increase recognized as part of other comprehensive income and losses charged against profit. As intangible, the likes of Bitcoins and Ethereum lack physical substance and are incapable of being perceived by most senses other than the euphoria of any appreciation and disappointment of devaluation. However, one argument going against this accounting treatment is the supposed use of intangible assets, which are primarily for business operations, specifically production and consumption, as opposed to coins that are mainly traded. In the absence of any other pronouncement and issuance, intangible asset may seem to be the more reasonable choice, but nonetheless warrants further study and evaluation.

    Indeed, the current pace of developments surrounding digital coins and tokens poses significant challenge to regulators. Any future issuance or soon-to-be pronouncement may prove to be already outdated and obsolete. Until all these legal and accounting ambiguities are addressed, investors can only fervently hope that virtual assets today do not end up as digital liabilities tomorrow.

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    Pocholo C. Domondon is an Assurance partner of Isla Lipana & Co., a member firm of the PwC network. He also co-leads the firm’s VentureHub@PwCPH, a one-stop-shop approach to offering solutions to startups, SMEs, and entrepreneurs who want to grow and professionalize their businesses.For more information, please email markets@ph.pwc.com. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.


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