Question

A few years ago, A CBC News story, noted how a a small – but increasing – number of employees are beginning to accept Bitcoin as payment for their wages. This is evidence perhaps of the growing acceptance of Bitcoin by merchants and the increasing discussion of Bitcoin currency exchanges. Bitcoin began in 2009, and has been gaining more widespread attention and gaining in acceptance. (See this link for a short video on Bitcoin’s operations).

Shrad Rao, the CEO of Waterloo, Ontario, payroll processing firm Wagepoint, stated that last year they began offering a Bitcoin payment option to employees of some clients. Rao said this was only a “side project”, and Wagepoint was really not expecting any uptake by employees. But, employees from ten of Wagepoint’s clients have taken advantage of the Bitcoin option to date. Not surprisingly, most employees opting to accept Bitcon are from firms in the technology sector.

Wagepoint allows participating employees to take all, or part, of their wages in Bitcoin. Canadian payroll taxes are deducted from the gross pay by Wagepoint before the employee can take any of the remainder in Bitcoin. Meanwhile, the Canada Revenue Agency’s (CRA) position is that Bitcoin is not a currency. Rather, it views Bitcoin as property. In other words, a payment in Bitcoin is viewed by CRA as a barter transaction. It is still taxable, however, and those receiving it as payment of wages are expected to declare the Canadian dollar value of the amounts received on their tax returns.

Discussion Questions

1) Would you be interested in accepting some or all of your pay in Bitcoin? Why or why not?

2) If you were an auditor at one of these firms, what are some of the challenges associated with auditing cryptocurrency. What is Bitcoin for accounting purposes? How is it measured? What assertions are a challenge and why?

3) What do you think the future of Bitcoin, the digital currency, might be?

Answer 1

(1) No, as an employee I don't wanted to be paid in bitcoin, because the First main reason is the volatile nature of cryptocurrencies and the unclear tax laws that govern the assets point to potential headaches down the line.

cryptocurrency that is used to pay salaries less frequently is also the most popular among investors: bitcoin. "As far as I know, companies would not pay their employees in bitcoin," An employeer said. "If they would do that, they first have to acquire the bitcoin somewhere. It doesn't really make sense."

Employeers said that payments in bitcoin aren't realistic for most companies. "I haven't seen someone paid in bitcoin, because unless the person paying pre-mined a big load of bitcoin, they'd have to purchase the bitcoin, which would just be a pain in the neck."

However, some exchanges won't accept more obscure cryptocurrencies and require people to convert them into bitcoin before they exchange their crypto into traditional currency.

(2) THE CHALLENGES FOR AUDITORS FOR CRYPTOCURRENCY ARE-

•Client takeon

• Accounting for cryptocurrencies or tokens held

• Accounting for issue of tokens

• Auditing issues

• The future of auditing

Issues for Accountants and Auditors – Client takeon

• Start Up

• Experience and expertise of management

• Lack of Corporate Governance structure

• Compliance with laws – AML/GDPR

• Regulatory Issues

• Feasibility of underlying business model

• Rationale for use of cryptocurrency/ICO

• Appropriate investor funding

• Reliability of Financials

• Customer interests

• Scope/risk of engagement

Issues for Auditors – Holding cryptocurrencies

• Verifying existence and ownership

• Increased AML risk

• Valuation

• Post year end review - volatility

Issues – Accounting for Cryptocurrencies

• Not a currency!

• Not cash or cash equivalent

• Not a financial instrument

• Usually not inventory

• Probably an intangible asset

• Identifiable, non-monetory asset with no physical form

• Fairer presentation is to FV and show gains through P&L but

accounting standards do no allow that – need new specific

accounting framework

Issues for Audit– ICO

• Revenue recognition

• Token creation and issue costs

• Issue of tokens to founders/employees/advisors

• Payment for products/services with tokens

• Taxation – management and control/PE

• Capitalisation of platform development

Accounting of Bitcoin

At first, it might appear that cryptocurrency should be accounted for as cash because it is a form of digital money. However, cryptocurrencies cannot be considered equivalent to cash (currency) as defined in IAS 7 and IAS 32 because they cannot readily be exchanged for any good or service. Although an increasing number of entities are accepting digital currencies as payment, digital currencies are not yet widely accepted as a medium of exchange and do not represent legal tender. Entities may choose to accept digital currencies as a form of payment, but there is no requirement to do so.

IAS 7 defines cash equivalents as ‘short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value’. Thus, cryptocurrencies cannot be classified as cash equivalents because they are subject to significant price volatility. Therefore, it does not appear that digital currencies represent cash or cash equivalents that can be accounted for in accordance with IAS 7.

Intuitively, it might appear that cryptocurrency should be accounted for as a financial asset at fair value through profit or loss (FVTPL) in accordance with IFRS 9. However, it does not seem to meet the definition of a financial instrument either because it does not represent cash, an equity interest in an entity, or a contract establishing a right or obligation to deliver or receive cash or another financial instrument. Cryptocurrency is not a debt security, nor an equity security (although a digital asset could be in the form of an equity security) because it does not represent an ownership interest in an entity. Therefore, it appears cryptocurrency should not be accounted for as a financial asset.

However, digital currencies do appear to meet the definition of an intangible asset in accordance with IAS 38, Intangible Assets. This standard defines an intangible asset as an identifiable non-monetary asset without physical substance. IAS 38 states that an asset is identifiable if it is separable or arises from contractual or other legal rights. An asset is separable if it is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability. This also corresponds with IAS 21, The Effects of Changes in Foreign Exchange Rates, which states that an essential feature of a non-monetary asset is the absence of a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency. Thus, it appears that cryptocurrency meets the definition of an intangible asset in IAS 38 as it is capable of being separated from the holder and sold or transferred individually and, in accordance with IAS 21, it does not give the holder a right to receive a fixed or determinable number of units of currency.

Cryptocurrency holdings can be traded on an exchange and therefore, there is an expectation that the entity will receive an inflow of economic benefits. However, cryptocurrency is subject to major variations in value and therefore it is non-monetary in nature. Cryptocurrencies are a form of digital money and do not have physical substance. Therefore, the most appropriate classification is as an intangible asset.

IAS 38 allows intangible assets to be measured at cost or revaluation. Using the cost model, intangible assets are measured at cost on initial recognition and are subsequently measured at cost less accumulated amortisation and impairment losses. Using the revaluation model, intangible assets can be carried at a revalued amount if there is an active market for them; however, this may not be the case for all cryptocurrencies. The same measurement model should be used for all assets in a particular asset class. If there are assets for which there is not an active market in a class of assets measured using the revaluation model, then these assets should be measured using the cost model.

IAS 38 states that a revaluation increase should be recognised in other comprehensive income and accumulated in equity. However, a revaluation increase should be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset that was previously recognised in profit or loss. A revaluation loss should be recognised in profit or loss. However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance in the revaluation surplus in respect of that asset. It is unusual for intangible assets to have active markets. However, cryptocurrencies are often traded on an exchange and therefore it may be possible to apply the revaluation model.

Where the revaluation model can be applied, IFRS 13, Fair Value Measurement, should be used to determine the fair value of the cryptocurrency. IFRS 13 defines an active market, and judgement should be applied to determine whether an active market exists for particular cryptocurrencies. As there is daily trading of Bitcoin, it is easy to demonstrate that such a market exists. A quoted market price in an active market provides the most reliable evidence of fair value and is used without adjustment to measure fair value whenever available. In addition, the entity should determine the principal or most advantageous market for the cryptocurrencies.

An entity will also need to assess whether the cryptocurrency’s useful life is finite or indefinite. An indefinite useful life is where there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity. It appears that cryptocurrencies should be considered as having an indefinite life for the purposes of IAS 38. An intangible asset with an indefinite useful life is not amortised but must be tested annually for impairment.

Bitcoin price determination

The price of Bitcoin is not the same as its value. Price is determined by the market in which it trades: by means of supply and demand. This is the same way the price of your secondhand car, a bag of apples in the supermarket, an ounce of gold .

Put simply, it is the ongoing interaction between buyers and sellers trading with each other that determines the specific price of Bitcoin (and everything else).   

However, when determining price, one must also consider the amount that buyers are currently willing to pay for the future value of a specific item. In other words, if the market believes the price of something --like property, a certain stock or Bitcoin-- will increase in the future, they are more likely to pay more for it now.
Some of the instances where Bitcoin currently has utility was mentioned above, but since Bitcoin is an evolving and improving technology, many are optimistic that there are many other use cases to come. Some, perhaps, that we haven’t even thought of yet.

(3)  

BITCOIN FUTURE

The future outlook for bitcoin is the subject of much debate. While the financial media is proliferated by so-called crypto-evangelists, Harvard University Professor of Economics and Public Policy Kenneth Rogoff suggests that the “overwhelming sentiment” among crypto advocates is that the total “market capitalisation of cryptocurrencies could explode over the next five years, rising to $5-10 [trillion].”8

The historic volatility of the asset class is “no reason to panic,” he says. Still, he tempered his optimism and that of the “crypto evangelist” view of Bitcoin as digital gold, calling it “nutty,” stating its long-term value is “more likely to be $100 than $100,000.”

Rogoff argues that unlike physical gold, Bitcoin’s use is limited to transactions, which makes it more vulnerable to a bubble-like collapse. Additionally, the cryptocurrency’s energy-intensive verification process is “vastly less efficient” than systems that rely on “a trusted central authority like a central bank.”

Bitcoin’s main benefits of decentralization and transaction anonymity have also made it a favored currency for a host of illegal activities including money laundering, drug peddling, smuggling and weapons procurement. This has attracted the attention of powerful regulatory and other government agencies such as the Financial Crimes Enforcement Network (FinCEN), the SEC, and even the FBI and Department of Homeland Security (DHS). In March 2013, FinCEN issued rules that defined virtual currency exchanges and administrators as money service businesses, bringing them within the ambit of government regulation. In May that year, the DHS froze an account of Mt. Gox – the largest Bitcoin exchange – that was held at Wells Fargo, alleging that it broke anti-money laundering laws. And in August, New York’s Department of Financial Services issued subpoenas to 22 emerging payment companies, many of which handled Bitcoin, asking about their measures to prevent money laundering and ensure consumer protection