Insight & Analysis

Accounting for growth in digital treasury assets

Published: Dec 2021

As long as they are comfortable with the treatment of digital assets from an accounting perspective, there is no reason why more corporates should not acquire such assets for treasury purposes.

Growth arrow blocks being built

Last week, digital assets hedge fund manager Nickel Digital Asset Management published analysis showing that 20 listed companies with a market cap of over US$1trn had around US$9.3bn invested in Bitcoin.

North American corporations dominated the list with US and Canadian companies seeking a hedge against inflation and an uncorrelated source of returns accounting for 13 of the 20.

Nickel’s analysis revealed a further 19 listed companies have purchased Bitcoin without revealing the full details of their portfolio composition at this stage.

According to Anatoly Crachilov, the company’s CEO and founding partner, analysis of digital assets performance versus traditional asset classes shows sizeable outperformance by the former over the medium to long term.

The challenges of holding digital assets on a corporate balance sheet have declined due to the emergence of regulatory clarity and a legitimate infrastructure for buying and holding digital assets.

One of the remaining requirements is education around digital assets and the due diligence required to understand how the corporate will physically buy, store, sell and generate yield safely on this asset class says Ben Sebley, Chief Growth Officer BCB Group.

“The other challenge is understanding how the corporate is going to financially report its digital asset holdings so that it remains compliant with its own internal policies as well as any jurisdictional or industry exemptions that may dictate how it might have to do it outside of its own ‘norms’,” he adds. “However, this is something that most CFOs should be comfortable deciding.”

The accounting treatment for digital assets can be a challenge for corporations. IFRS does not include specific guidance on accounting for digital assets and there is no clear industry practice, so it could fall under a variety of different standards.

The decision around which standard applies depends in large part on the corporation’s intended use for the digital asset as well as the characteristics of the asset explains Chris Tyrer, Head of Fidelity Digital Assets in Europe.

“Many corporations that decide to hold Bitcoin for investment purposes over long periods of time find that the IAS 38 standard on ‘intangible assets’ fits their intended use,” he says. Under IAS 38, if the digital asset has an active market the corporation may have a choice of utilising either the revaluation method or the cost method.

Managing digital assets alongside traditional stores of value is rather more straightforward, with corporates having the option of choosing an all-in-one solution or working with multiple providers for services from liquidity to custody.

“The key thing here is reporting and being able to track and mark-to-market your assets as well as any unrealised gains or losses,” says Sebley. “This is something that most large companies are used to with their own diversified treasury management strategies. Digital assets are just another asset class that falls within a balance sheet.”

According to Tyrer, Bitcoin’s adoption as a store of value is unlikely to be linear. However, he anticipates that its day-to-day volatility may come down over time as the development of new products leads to greater ownership and participation by more traditional market participants.

“Due to the unprecedented levels of monetary and fiscal stimulus during the pandemic and the attractiveness of a fixed supply uncorrelated asset, we have seen an acceleration of interest in Bitcoin as a hedge against inflation and as a portfolio diversifier,” he says.

“We are also seeing more and more investors viewing Bitcoin as an alternative investment similar to an allocation to venture capital,” adds Tyrer. “The uniqueness of bitcoin is that it can be treated as an emerging store of value, but it can also be used as part of the operational capital.”

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