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    What are The Accounting Challenges for Digital Assets?

    Lakisha DavisBy Lakisha DavisOctober 23, 2023
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    What are The Accounting Challenges for Digital Assets?
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    Modern businesses trade in assets of many different kinds. Some of them are physical, while others consist solely of information – stored via tiny zeroes and ones.

    Digital assets present a slightly different set of challenges for accountants. Disentangling the two is something that the right consultant firm can help with – but what if we don’t have that luxury?

    Let’s look at a few of these challenges, and consider how they can be overcome.

    Valuation challenges

    How much is a single bitcoin worth? The answer can vary tremendously from one year to the next. If an asset can experience price swings of several hundred percent in a single afternoon, then recording a valuation can be very difficult. Get it wrong, and the financial consequences for the business in question can be dire.

    Then there’s the fact that assets of this kind don’t enjoy a centralised, unified standard for valuation, in the same way as other commodities.

    In some cases, the value of an asset at the point of purchase can be very different from its value when the transaction comes to be recorded. Speed and accuracy are therefore critical. Get it wrong, and you could find yourself in hot water with the exchequer.

    Recognition

    There’s some significant grey area surrounding certain digital assets. Do they qualify as assets at all? How should a non-fungible token be recorded? Are cryptocurrencies actually currencies at all, or are they more like barrels of oil or bars of bold? These are questions whose answers are not always clear.

    Where digital currencies are being used for a specific purpose in a given project, they might be regarded as intangible assets. In cases where they’re being used as a straightforward store of value, this might not be quite as appropriate. Of course, in many cases, the distinction between these two things might not be completely stark.

    Crypto borrowing

    What happens when we’re borrowing digital assets? The advice when it comes to digital assets largely goes out of the window, because in this case we’re not storing the asset, but the liability.

    Supposed that you borrow a single bitcoin at a price of ten thousand dollars. The price then skyrockets to a hundred thousand. You will still owe the hundred thousand – but on your books, the liability will be recorded at the original price of just ten. You’ll have a negative equity recorded of ninety thousand dollars.

    Explaining all of this to investors can be slightly challenging. The practice of dealing in digital assets of this kind can appear, at the extreme end, to be slightly casino-esque. For this reason, businesses are right to be cautious about making big moves into this space.

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    Lakisha Davis

      Lakisha Davis is a tech enthusiast with a passion for innovation and digital transformation. With her extensive knowledge in software development and a keen interest in emerging tech trends, Lakisha strives to make technology accessible and understandable to everyone.

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