Source: scb.co.th

4 Common Accounting Issues Companies Face When Investing In Digital Assets   

Companies have a lot of promise with digital assets, but adding this asset class to the balance sheet can be a challenge, especially if digital asset accounting is still a problem.

Because the value of digital assets fluctuates frequently, a company’s financial statements and tax reporting do not always match. A company’s time, effort, and labor are consumed by the volume of transactions and all the varied elements that must be tracked.

We’ll go through four major issues that make accounting for digital assets so tough right now:

1. Borrowing of Cryptocurrency

It isn’t easy to keep track of crypto borrowing activity. When a business borrows 1 BTC, for example, the asset is recorded on the balance sheet. It needs to be tracked as an intangible asset, then evaluated for market changes to account for impairment.

A liability must also be recorded in addition to the asset to show the obligation to repay the 1 BTC borrowed at a later date. However, there is a substantial difference in how a business accounts for its liabilities.

Because cryptocurrency-denominated liabilities are liabilities rather than assets, they are not accounted for utilizing intangible asset advice. Instead, the crypto liability is recorded at fair value, with changes in fair value flowing through earnings via the establishment of a derivative contract that reflects the underlying liability’s value.

Source: keycoinassets.com

The liabilities will increase if the fair value of the borrowed underlying asset rises. Similarly, if the fair value of the asset falls, so does the liability. This disparity in the accounting treatment of crypto assets and liabilities provides a significant difficulty for businesses and financial statement readers alike.

A balance sheet mismatch occurs when assets are retained at cost while liabilities fluctuate according to fair value fluctuations; this mismatch may result in net equity results that aren’t in line with economic realities.

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2. Tax Implications

The IRS has been more vocal about how it wants individuals and firms to treat digital assets for tax reasons, whereas accounting bodies have been sluggish to give official recommendations. Revenue Ruling 2019-24 and an updated FAQ on virtual currency transactions were published by the IRS in October 2019. The revised guidance clarified the taxation of hard forks and airdrops, as well as the accounting and calculation of virtual currency gains and losses.

Because digital assets are classified as general property by the IRS, there are numerous opportunities for a taxpayer to make a capital gain or loss. Whether a digital asset is traded for a tangible good, invested in a partnership, or used to pay network fees, the taxpayer must compute capital gain on each transaction.

Many taxpayers adopt a cautious approach to digital asset tax filing because of the ongoing uncertainties around their taxation. Those dealing in digital currency should seek expert advice to ensure that they fully comprehend the tax implications of doing or participating in an offering.

3. Accounting Revenues

Source: forkast.news

If a corporation buys a tangible good from another company in return for a digital asset and there are no variable considerations, the transaction is likely to fall under the revenue criteria. As a result, the assets will be valued as of the contract’s start date. When the good is transferred, that value will be utilized to record the revenue.

In addition, businesses must examine how to identify and track impairment indications for these assets, as well as how to calculate fair value when calculating an impairment. Then, as the digital assets are used in subsequent transactions, businesses must consider policies, methods, and controls for monitoring the assets in and out of wallets, as well as how they will maintain cost bases.

As the usage of digital assets becomes more widespread, these and other challenges require attention and consideration. The digital asset ecosystem is changing, and so are the problems and difficulties that come with it.

4. Failure To Understand Digital Assets

Given the risks and uncertainty involved in investing and maintaining digital assets, a strong internal control system is essential. In many ways, digital assets are distinct, and as a result, the risks that come with them may differ as well. Companies must comprehend the technical aspects of each asset in which they have invested, as well as how each one operates and identify market vulnerabilities.

Source: amplifi.io

Another important factor to examine is the asset’s custody. Will the corporation be able to take custody of the asset itself, or will it rely on third-party vendors? Self-custody provides some benefits, such as ease of access, but it also has some drawbacks, such as the danger of loss due to accident or theft. Recordkeeping, such as the monitoring and documenting of initiated transactions, must also be considered. Because of the inherent complexity and risk of self-custody, third-party custodians are frequently used. Companies that utilize a digital asset custodian must thoroughly analyze their vendor’s control measures because third-party suppliers come with their own set of risks.

Separation of duties is also required – after all, this is a type of cash. A responsibilities matrix, which documents the approved “chain of command,” is still an important instrument for preventing fraud and ensuring that only authorized transactions are permitted. Transactions committed to the blockchain must also be monitored on a regular basis. Also, keep in mind that digital assets are not protected by the Federal Deposit Insurance Corporation (FDIC). Consider whether you’ll need more coverage in the event of a loss.

Conclusion

Source: investing.com

Prepare for additional queries concerning the nature of your activities from your accounting and tax providers if your company uses digital assets or cryptocurrency. Be aware that regulatory guidance on reporting is continuously evolving, so the rules of engagement now may be different in the future.

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