Accounting standards developed for the 20th century cannot evaluate and evaluate 21st century cryptocurrencies, according to the American Institute for Economy Research.
Bitcoin has evolved a lot from the first days it was created until today, it has been transformed from a movement into an investment tool with the valuation now exceeding 1 trillion. dollars.
Now Bitcoin and other cryptocurrencies have created an alternative system of financial investments and payments.
An issue that has not yet been addressed
One issue that has not yet been addressed is the valuation of cryptocurrencies.
Companies around the world rely on international or national accounting standards, they are the rules of valuation and analysis of assets.
But cryptocurrency accounting as it stands today has no meaning or correlation for businesses.
There are currently no widely accepted valid accounting guidelines for cryptocurrencies.
Some specific countries have implemented unique approaches that stand out, but these are not widely adopted outside of these countries.
In the world of accounting, the two standard-setting bodies are the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB).
It is true that the IASB has proven to be more flexible in terms of accounting encryption but there are no authentic standards for this purpose.
In the US, and despite significant efforts by the American CPA Institute (AICPA) to publish unauthorized research, the FASB has so far refused to address the issue of cryptocurrency accounting guidance.
Because there are no valid standards, the view has been developed that cryptocurrencies should be treated as an intangible asset of indefinite duration (such as goodwill). At first glance, all this looks good as cryptocurrencies are intangible and do not have a set expiration date.
But analyzing the data quickly reveals how inappropriate this classification is for cryptocurrencies.
According to the accounting rules for intangible assets of indefinite duration, these assets are kept in the balance sheet at the price paid (investment cost) less any impairment charges.
Impairment, without becoming overly technical, is a process by which assets are valued to determine whether or not the carrying amount reflects market value.
If the market value has decreased, the asset is reduced and an expense is recorded in the balance sheet.
According to US accounting standards, there is another side to remember.
Once an asset has been impaired, it cannot be inventoried regardless of what is happening in the market.
This accounting may be good for goodwill, but it does not work for cryptocurrencies.
According to this approach, any organization that invests in cryptocurrencies should record this investment in costs and change it whenever conditions lead to impairment or increase, this is not possible.
Cryptocurrencies are still a volatile market, e.g. in 2021 there were double-digit percentage changes in prices for Bitcoin and countless other cryptocurrencies.
Possible solutions
There are two possible solutions that could eventually be applied to companies’ balance sheets given the large fluctuations and valuations of cryptocurrencies.
First choice
To treat cryptocurrencies as a commodity-like medium.
It would allow changes in market value to be reported as they appear on the balance sheet and to be reported in the income statement (or as other income).
Applying this approach, modifying existing standards to reflect a new asset class, will increase transparency
Second choice
A second option, and one that in a perfect world would already be in progress, is to develop entirely new standards for this completely new asset class.
Obviously this would take more time, it would require high levels of cooperation, but the new regulatory framework could make sense.
Classifying different cryptocurrencies according to the case of use (currency alternative, commodity equivalent or equity instrument) would allow new investors to enter.
Accounting professionals need to learn to live and work with encryption and standard accounting standards need to change to incorporate new trends.
Applying standards developed for the 20th century economy to assets that now include cryptocurrencies is unrealistic.
The issue needs to be fixed to avoid future problems
