Crypto is about to change the bookkeeping rules – and soon the accounting profession
“Accounting is the language of business,” said Warren Buffett. “You have to be as comfortable with it as you are with your own native language to really evaluate businesses.”
Buffett is right. Modern accounting is so important that some consider double-entry bookkeeping to be one of the great innovations of the time. According to economist Tim Hartford and others, it enabled Venetian and Tuscan merchants in the 14th century “to keep track of … extraordinarily intricate webs[s] of transactions” around the Mediterranean over time, laying the foundation for managing the modern global business.
Perhaps because of its long history, enormous size and enduring usefulness, the accounting profession takes time to absorb new information and update its rules.
Currently, there are no specific rules on how to account for cryptocurrency, which makes sense since the asset class itself is barely a decade old. This has led to some difficult jerry-rigging as the profession has tried to make the old rules fit a new asset class. That may soon change.
Crypto assets: Fair value and fair treatment
Earlier this month, the Financial Accounting Standards Board concluded that firms should measure crypto assets using fair value accounting, with gains and losses recorded in comprehensive income in the current period. This decision is not final, and it will therefore take time for these standards to be reflected in US GAAP and other accounting rules that guide the profession’s day-to-day decisions. (For a detailed overview, read KPMG’s report on the decision.)
Still, this is a big step forward as it brings us closer to the day when it will be convenient and easy for companies to carry crypto assets on their balance sheets. Currently, the lack of clarity in accounting standards for cryptoassets is often cited as a reason for the limited use of cryptoassets by firms.
According to a recent article in CPA Practice Advisor, most crypto assets are accounted for as indefinite-lived intangible assets, such as trademarks, in the absence of crypto-specific US GAAP. This often means that companies must carry the asset at its lowest value since purchase, rather than simply marking to market based on current values. Logically, a company would prefer not to hold an asset if it is carried at an artificially low value, especially if it means they have to take a significant write-down on that asset as it declines in value from its purchase price. Nevertheless, despite the financial headache, some companies like Block Bitcoin have, while many more want to do so.
In the coming years, many companies will own crypto-assets, either as a treasury investment or because it is essential to run their day-to-day business – for example, it is easy to imagine that many companies offering web3 services will need to have ETH on their balances to act as a network validator. This should make adoption so much easier.
(Blockchain’s impact on accounting and other core financial services functions will play a central role at the upcoming Web3 and Blockchain World Event on November 8-9 – there are a handful of tickets left.)
Remember GAAP: Breaking traditional accounting
In the short to medium term, this is a major positive that will ease the way for companies to own this asset class. In the long term, however, we believe that much of the accounting industry itself will be replaced as more transactions move up the chain. Blockchains enable triple-entry bookkeeping, with the third entry (or entries) appearing on the chain, meaning that each transaction created an entry in a blockchain that everyone can see. We can already search, verify and audit data on the chain across a number of blockchains. Soon we will have an overview of large amounts of economic activity, not only the movement of money, but also the trading of financial assets, IP and even physical goods in this way.
The example of Yearn Finance is illustrative. The DeFi lender has made its GitHub repository a destination for data about the platform, all of which can be independently verified on-chain. On it, we can track every Yearn transaction in real time, get transaction records and search for protocol income, protocol expenses, profit and loss account, month-end balance and more. We can see revenue forecasts, charts, tables and other useful data. In the future, a mix of on-chain verifiable raw data, data analysis tools and verifiable information curated by individual projects like Yearn will replace today’s quarterly reports and other financial paperwork.
In a world where chain data gives us a perfect snapshot of the financial health of an organization, what role does the accounting firm or auditor play? Plenty, it turns out. But instead of auditing data in a spreadsheet, auditors must assess data on the chain and audit smart contracts. Time for them to refresh Web3.
Alex Tapscott is a co-founder of The Blockchain Research Institute, hosted by W3B and Blockchain World, in Toronto, 8-9 November. Alex is also CEO of The Ninepoint Digital Asset Group. The opinions expressed in Fortune.com comments are solely the views of their authors and do not reflect the opinions or beliefs of Fortune.
This story was originally featured on Fortune.com
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