The Australian Accounting Standards Board (AASB) has called for new standards for digital currencies like bitcoin after determining a lack of clarity and guidance on digital currencies in the International Financial Reporting Standard (IFRS) by the International Accounting Standards Board (IASB).
The AASB, a government agency that develops and maintains financial reporting standards relevant to private and public sectors of the Australian economy, published a new paper in the weeks leading up to a December meeting, titled “Digital Currency – A case for standard setting activity” [PDF].
In it, principal author Henri Venter argues that existing accounting frameworks where digital currencies could be accounted for are insufficient, noting that digital currencies “should be measured at fair value with changes in fair value recognized in profit or loss.” Broadly speaking, the Australian Govt paper is fundamentally highlighting the lack of an accounting standard by the IASB when dealing with digital currencies and other commodities or intangible assets.
Indeed, under current IFRS standards and accounting literature, a digital currency does not meet the definition of cash or cash equivalents a financial instrument, inventory or intangible assets, as determined by the AASB.
Bitcoin Requires Attention of Standard Setters
With a focus on Bitcoin, “the biggest and best known digital currency” as the paper notes, there is a significant number of daily transactions and trading volumes that makes it relevant for broader international standards according to the author.
The paper underlined that market capitalization has more than doubled from $4.33 billion on October 2015 to $10.9 billion in October 2016, inspite of its volatility.
To this end, the paper read:
In our opinion, given the increase in the number of transactions and the market capitalization, the expectations of use of similar currencies and the time it takes to develop a standard, it is imperative that accounting standards should be used to cope with a significant market development such as digital currencies.
As possible solutions, the Australian agency recommends a handful of choices including issuing a new IFRS, amending the definition of cash or cash equivalents to include digital currencies, and similarly with the definition of a financial asset.
Ultimately, it adds:
In our opinion, the most appropriate course of action is a new IFRS that provides clear guidance on the accounting for digital currencies but that also addresses the larger problem of intangible assets and commodities held for investment purposes.
Australia’s recommendation for guidelines and standards of bitcoin and digital currencies as investments comes during a time when the United States’ Internal Revenue Service is seeking to ascertain records of bitcoin transactions of users at Coinbase, a digital currency exchange. The IRS court filing comes within days after a sweeping critique by the Treasury Inspector General who highlighted the lack of a viable strategy by the IRS to tax income related to digital currencies.
Taking the Lead
Australia also pushed for uniform global standards with blockchain development in an increasingly frenetic climate where banks, technology giants, financial institutions and various other industries are developing blockchain-based solutions, some collaboratively and others independently. Pitching the need to introduce standards that could help establish interoperability between chains and entire industries, Australia is now heading an international standards committee as a part of the ISO, to build a uniform approach to the technology. Key areas of focus will include permission blockchain models – both public and private; smart contracts and; application programming interfaces and more.
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