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Martynas Pelenis. An open question for accountants: cryptocurrency

NordgainNordgain News Martynas Pelenis. An open question for accountants: cryptocurrency

Martynas Pelenis. An open question for accountants: cryptocurrency

In Lithuania, as like in the rest of the world, cryptocurrency is currently in the spotlight. Even people who know little about the matter, follow the bitcoin course, share predictions about its future. Due to the cryptocurrency‘s nature which allows you to conceal your identity, many treat it as a tool for money laundering. Illegal businesses, of course, are last on the list to puzzle themselves with accounting.

Thus, the problem of accountants is simpler: we still do not have a standard for keeping a cryptocurrency account.

Accounting of cryptocurrency: What is it?

For many company accountants in Lithuania the problem starts with the definition of this instrument the cryptocurrency is intended to be a mean of payment, money.  However, money is being created, authorized and regulated by states, and cryptocurrencies are not. Another term to define cryptocurrencies is a “cash equivalent”. Unfortunately, this is also misleading because accounting standards indicate that the value of cash equivalents cannot vary significantly. Meanwhile, the value of cryptocurrencies fluctuate enormously.  Both International and Lithuanian Business Accounting Standards do not allow the assignment of cryptocurrencies neither to money, nor to money equivalents. If the cryptocurrency’s cannot be included in the money and money equivalents line in the company’s balance sheet, then where do show the bitcoins, ethereums, lightcoins and other  cryptocurrency’s you have in possession?
One of the options is to treat cryptocurrencies as a financial instrument. However, the definition of a financial instrument states that its holder has an indisputable right to receive other assets in exchange for that instrument. With cryptocurrencies, there is no other party that would be committed to provide other assets for cryptocurrencies. So, this definition is also not very suitable for them.  Another way is to treat cryptocurrencies as a long-term intangible asset. But here we see a lack of precision, because according to the definition, these assets should provide long-term advantages for business.  Another option is to put the cryptocurrencies in the balance sheet as stock. Such a description would be precise enough for businesses engaged in trading cryptocurrencies. Unfortunately, this would not suite other types of businesses.

Detailed explanatory notes

As the Bank of Lithuania publicly announces that cryptocurrencies in Lithuania are not supervised and are unregulated, there is no official explanation of how to account for it. The Audit, Accounting, Property Valuation and Insolvency Management Service under the Ministry of Finance of the Republic of Lithuania has no explanation as well. So far, experts from this institution provide consultancy. In their opinion, “virtual currency, in terms of its nature and economic significance, could be recognized as short – term financial assets in accounting and presented in the financial statements as other financial assets, other investments or money equivalents”.

It seems that, as long as there are no clear guidelines, standards and regulations, companies have the freedom to decide how to account their cryptocurrencies I.e. the entity must select and apply accounting policies so that the financial statements present accurate financial information and performance of the company. In this case, the virtual currency should be recorded according to its content and economic meaning. One should look at the nature of the company’s business, take into account the importance of cryptocurrencies for the company, and decide on which line of the balance sheet it fits best: money, securities, fixed assets or stocks. By including the cryptocurrencies in the selected line, for example, “money and money equivalents”, it is important to explain and describe the information in the balance sheet and the operations performed with the  virtual currency‘s. This representation is required for third parties to see potential risks for the company and to have a accurate view of the company’s financial position.

As far as cryptocurrency accounting is concerned, it is important to keep in mind that financial and tax accounting are two different things. If the peculiarities of tax accounting are more or less clear, there are a lot of remaining questions in the financial accounting. (Incidentally, in terms of accounting for virtual currency trading (ICO), there are even more questions, but this is a separate topic.) Such a unclear situation can mean only one – similar projects are at increased risk because it is difficult for third parties to see the real situation of companies financial situations. Due to the speculative possibilities, the growing interest in cryptocurrency may well crumble in the future, but I have no doubt that cryptocurrencies will not disappear. Perhaps these definitions and accounting standards will be created. Until the responsible authorities have submitted their assessments of treating cryptocurrencies, companies have to take into account the traditional criteria of justice, intelligence and honesty.