Bitcoin was all everyone could talk about a few years back. It was the cryptocurrency that was threatening to take over the world by storm. However, the buzz has recently subsided. There is much less talk about bitcoin these days, but if you think it has gone away, you are wrong. It is actually quite the opposite. According to recent reports, there are more than 100,000 retailers that accept bitcoin all over the world. It is has moved past the point where it was considered the currency of the arms traffickers and drug dealers to coming into the mainstream and becoming the currency of choice for the tech savvy millennials of today.
Accounting for Bitcoins
Now that more people know about bitcoins and are actually using them, we have started hearing more questions about how should businesses account for the transactions denominated in bitcoins or for the holdings of bitcoins. As one would expect, there is no guidance of when it comes to using cryptocurrencies such as bitcoins on an official level. Thus, any person or organization using bitcoins will have to go back to the first principles and play the hit and trial method to find out what is appropriate. While the following are some personal thoughts rather than a definitive guide, they can prove to be useful when one is making a guideline for accounting of transactions involving bitcoins.
Bitcoins are taken and regarded by people as a cash equivalent or a form of cash. Accounting for bitcoins will become pretty straightforward. However, this doesn’t seem quite right as you can convert bitcoins to any form of currency at any given point of time, but they are not cash themselves. They can also not be treated as cash equivalents owing to almost no risk of having a change in their values. They might attain the status of being cash equivalents some point later in time, but we haven’t quite reached there yet.
What is the Possible Solution?
If they are neither cash nor cash equivalents, can they be treated as financial assets then? No, they don’t meet their definition either. They are more like gold or other commodities, in which case they can be treated as an intangible asset or an inventory based on the business that holds them. If we treat them as a commodity, they would need to be measured at the value of services or goods at the time of transaction, which in most cases would be measured at a cost minus any impairment. If the entity, however, is a bitcoin trader, it would be better to measure the bitcoin at a fair value using the ideal of profit and loss.
As mentioned above, these are nothing more than tentative thoughts. The accounting practices will evolve over time and one day, we might have a proper accounting standard and system dedicated to bitcoins. Since these cryptocurrencies and their use is becoming increasingly common, we need to develop accounting practices to record the transactions soon to ensure we have the right system which can be accounted for legally and professionally. It is no longer a currency used only by criminals and the drug mafia. It is becoming increasingly mainstream and thus needs to be taken seriously by the accounting authorities.