< Intro >
– Welcome back to Count Me In.
The podcast about all things affecting
the accounting and finance world.
In today's episode we explore the world of crypto accounting
with Matt Druckman, currently,
the Vice President of Business Development at Soft Ledger.
A company focused on helping companies get their data faster.
Despite the existence of non-authoritative guidance,
there is still no clear framework for crypto accounting.
The lack of clarity is due to the,
constantly, evolving nature of digital assets.
Which are not easily categorized
within traditional accounting practices.
Join us as we navigate the Wild West of crypto accounting
and discuss best practices for accounting,
in this rapidly changing field.
< Music >
Matt, thank you so much for coming
on the Count Me In podcast today.
I'm really excited to be talking to you about crypto accounting.
And, as everybody knows, Bitcoin has been around since 2008.
But when you look at the authoritative guidance
there is none, it feels like the Wild West.
And maybe, as an expert in the field,
you can talk a little bit about what it looks like
to be in the crypto accounting space.
– Great, thanks so much for having me on, Adam.
Happy to get into this a little bit with you.
You're exactly right, there is not
authoritative guidance, yet, on the topic.
What we have is non-authoritative guidance.
We have this framework of best practices and opinions,
that have been pulled together that folks are following.
There's a really good practice aid that the AICPA put out on accounting
and auditing digital assets, and that's proven to be very helpful.
But there is not this authoritative
framework for people to follow.
So everyone's still figuring this out
and the nature of crypto, and digital assets,
and their evolution is it's this breakneck pace.
Things are changing on a daily, weekly, basis.
So there's, definitely, a need and an increased vocalization
to have this guidance in place.
And it does look like the FASB
is really starting to take a harder look at this,
we'll probably get into it a little bit later.
but there's been some momentum,
recently, specifically, in October,
but right now it's still early days.
– So when we think about accounting.
It's been the same since the 15th century,
when the first accountants came into place
and they were writing their entries.
The accounting has pretty much been the same at its core.
And when you look at digital assets,
they don't really fit that core.
And, so, what does that look like, especially, prior to this FASB vote
that happened in October of 2022?
– Yes, it's a great point.
And, so, you have this new asset class,
digital assets, come into play here,
and we need to figure out a way to account for them.
And, I think, that's where some of this
complexity has really arisen, is trying to figure out where to put these.
And then once you put them there,
what guidance are we following?
And there, probably, isn't a one-size-fits-all
and that's what's happened.
And, so, currently, or prior to this vote,
digital assets, for the most part,
were treated as intangible assets,
and following the guidance within ASC 350.
And, so, as a result, you also need to follow
the impairment guidance that exists,
and it doesn't quite match up with the economics
of what's taking place with a lot of these assets.
Where you have these very active markets,
readily available prices.
And, so, the idea of marking down an asset, impairing an asset,
when there is an event, which would theoretically
be anytime the price drops below cost.
You're never going to be able to write that backup.
And that just doesn't quite make sense,
in terms of how people are viewing these assets,
and how they're using them,
and they're leading to some very material impacts
on financial statements.
And, so, that in and of itself is an area that people
have been very vocal about,
and trying to take a better look at how these should be classified
and updating how we're accounting for them.
– So, Matt, are there any more complexities
that accountants have to be aware of,
as they're really getting into the nuts
and bolts of this accounting?
– Yes, the cost basis piece is definitely a tricky one
that we've addressed, and that can present a lot of issues,
especially, with higher volumes.
But another one that should be known
is just the accessing and making sense of your data.
It sounds like something that should be so simple.
You have this series of transactions
that are taking place on an exchange,
or within a wallet, or on a blockchain.
And you're just assuming that you can pull that data down, easily,
and it's all going to make sense,
and everything's going to be nicely categorized and classified
the way you want to see it.
And that's really just not the case, at least, not in all cases,
some have better data outputs than others.
But, especially, as you start to get into more complex transactions
and, maybe, you're getting more involved in DFI's, or dealing with NFTs,
or just different less-plain vanilla transactions, if you will.
Being able to make sense of the data that you're pulling down,
and tag that properly, and ensure that
that's going to be getting into the system
in a way that you want to report on it.
It can be a bit manual.
There could be a process that needs to take place,
to make sure that you're properly categorizing everything
and getting it into the system.
It's not just going to pop out of an exchange or another data source,
and everything's going to be nice and neat.
So I think that going into it,
knowing that there's going to need to be some work there
and probably some processes that need to be ironed out.
Certainly, if you have maybe a little bit more
of a sophisticated operation, and you're capable of putting
a business logic layer on top of that data
before it gets into your platform.
A system like ours, like Soft Ledger, that's programmable via API,
that's one way that data could be ingested.
So there are some things to help automate that
and smooth that process, but it can be a bit manual.
I would think that in the future, as there's more regulation
and more of an impetus to standardize data.
That should improve, and maybe there'll just be better tools,
if nothing else, to help scrape that data
and give you what you need, but just something to be aware of.
And, so, I guess, when we're talking about what crypto accounting
or accounting for digital assets,
at the end of the day, it's still accounting.
You're still going to be booking debits and credits.
The complexities, a lot of them
lie in the fact that there are a lot of new terms.
There are new terms being used that we're not familiar with.
People are learning about blockchains, and NFTs, and DFI protocols.
And what it really comes down to is getting more familiar with
what's really taking place with these transactions.
Understanding the nature of these transactions.
How they, ultimately, need to be classified and presented.
And I think that, on top of that, there's just
the inherent complexities
that come with dealing with a volatile asset
and high volumes of transactions,
if that's the case for your business.
That are going to present some difficulties and, thankfully,
there are systems out there that are specifically designed
to help automate some of these processes, and remove
some of the manual, cumbersome, elements that come with needing
to track and calculate cost basis.
But, ultimately, we are still accounting for assets
in the way that we are familiar with.
– So do you think that this FASB vote
will help bring us towards some guidance
or something to help accountants, in organizations, get to a place
where they can set that value properly?
– Yes, it really looks like things are moving in the right direction
and these things are never fast.
But just based on when this was taken up,
in May, and where we are right now.
On October 12th, the FASB voted to start treating these
under the guidance of Fair Value at ASC 820.
So rather than as intangibles where you're impairing these assets,
you'd be marking to market.
And, so, of course, this isn't going to cover all digital assets.
Initially, it was thought that
maybe this would just be Bitcoin and Ethereum,
but it looks like it's going to be broader than that.
And, I think, that this is really welcome,
and more in line with how people
are viewing and using these assets.
– So as people are continuing to use these assets,
it makes me think of your typical ERP system.
It doesn't seem like those ERP systems
were created with the ability to support
these types of assets because of the volatility.
I know in our talks, before this, we were talking about how, sometimes,
you have to go to eight decimal points with cryptocurrencies.
How are major organizations handling that?
– Yes, it's a great question, and there's a software component
and then there's just a human capital component, as well.
I mean, this is all new, for the most part.
I know it's been 14 years or whatnot,
as we said at the beginning.
But still, in terms of where things are
from an adoption standpoint, and from just an experience
and exposure standpoint, for a lot of accountants, it's very early.
So you have that component.
You also have the fact that a lot of these crypto businesses,
they're very early stage.
They're not going to have, in many cases,
an accounting or finance department.
Let alone one that's filled with experienced, X big-four, auditors.
So there's a lot that is still up and coming on that front.
But from an ERP and system perspective, yes, you're exactly right.
These systems weren't designed to handle digital assets.
This technology, these assets, didn't exist
when these systems were created.
And, so, you can bump into these issues.
The first one being that you're going to need
to have a separate, call it crypto tool,
to track your crypto activity
and then integrate that with a system
that wasn't specifically designed to handle crypto.
So there are issues that are going to exist
within that ERP, such as we refer to coin support.
Are they going to be able to represent
that specific asset in the system properly?
To your point, on decimal precision, a lot of these assets you need
to be able to go out eight decimal points.
Is that going to be a problem in a system
that wasn't designed to handle digital assets?
So there are a few points in the process
where things can break down and necessitate work-arounds.
Chief among them is needing to have this integration
between a crypto tool and an ERP system,
and that's something that we, specifically, address,
in the fact that at Soft Ledger,
we are a full-featured, cloud accounting platform,
but we're also crypto native.
And, so, for us, it's a sub-ledger and we don't suffer from issues
with coin support or decimal precision.
Everything's neatly stitched together in one system.
So you have this very controlled
and auditable way, to go from crypto transaction
to financial statement impact.
– Do you think that there is a gap in knowledge within the accounting
and finance team, within organizations?
Is there a gap in the competencies
that they're missing in understanding what crypto is?
And I even think back to even colleges,
are colleges catching up to training
the next level of accountants
so that they can be in this world where crypto is a thing?
– Yes, absolutely, I think that any gaps, really,
they're resulting from a couple of things.
It's the fact that, again, this is new but more important,
coming back to what we were discussing,
at the beginning of the show,
that authoritative guidance doesn't exist, yet.
So I think that once we get this hammered out,
then it's going to become a lot easier
to really embed this into the accounting
curriculum that's taking place.
But this is absolutely something that's being discussed,
at this point, because it's here
and it's on corporate balance sheets,
and it's going to continue to be an asset class.
It's going to change, I'm sure, and some of the digital assets
we're talking about won't be around.
But as a whole, this technology,
this is going to be a part of our future
and we're going to need to be spending the time
educating people on how to properly account for it.
– So it's almost like we need to educate
our accounting and finance team,
but also find partners such as Soft Ledger
or other crypto accounting softwares,
that can help your accounting team
get to a place where they're able to do this.
– Right, there's plenty that's been written,
but there's much more to come.
And I think that having these conversations,
having the platforms in place, is certainly a really helpful piece
because there are just inherent complexities beyond just the guidance.
Issues we've discussed with actually tracking and accounting
for these assets that present themselves,
that can be really quite cumbersome.
So I think that having not only the coursework
and bringing this into the classroom,
and having well-developed guidance,
but there's just going to be this need to continue
to have these other forums and places for people to go
and learn about this ever-changing landscape.
Because that is really one of the other real tricks to it all,
is that a transaction that exists this week,
that's novel, that's not going to be so novel next week, perhaps,
it's just a really evolving space.
And keeping up with the different types of transactions.
and understanding what the nature of those transactions are.
and how to properly treat them,
it's something that you need to stay on top of.
– So as you work with accountants
and accounting teams, in your organization.
What are some of the bigger pain points
that you're seeing that they're having,
as they're trying to work through
these different issues we've been discussing?
– Yes, it's a great question.
A pain point that, consistently, comes up
is tracking and calculating cost basis.
That is something that is always difficult,
especially, at higher volumes, depending on your operation.
Once you start to have any volume,
keeping track of all of your cost layers, in Excel,
can start to become quite cumbersome.
High volume combined with a volatile asset class,
constantly, fluctuating prices, it can really lead to a nightmarish situation
when it comes to actually determining
what the cost basis is on a given transaction,
so that you can appropriately calculate a gain or a loss.
So, at a certain point, and that point usually arrives pretty quickly.
You're going to need a system
that's going to enable you to do that properly,
and relieve that component from the accountant's day-to-day
because it really is a cumbersome process.
And, so, from a calculating your cost basis perspective,
according to the practice aid I mentioned earlier.
You're going to want to use a reasonable
and rational method is what they refer to as the cost method
that should be selected.
FIFO is what we see most commonly
and that is considered a reasonable and rational method,
and that would be what you would be using
to calculate the cost basis on a given transaction.
Other methods we do hear about,
and there's definitely a number of folks
that are interested in weighted average.
We certainly hear people discuss LIFO
and sometimes HIFO — Highest-In, First-Out.
There are clearly some tax advantage reasons behind that
but the guide, and the current best practices
to use a reasonable and rational method
and FIFO seems to check that box.
Another complexity that can, sometimes,
arrive is just finding the principal market
in terms of pricing information and that's not a difficult thing
when you're talking about BTC or ETH,
or some of these high-volume assets.
But more thinly traded assets, it can be maybe more challenging
to identify that principal market
in terms of identifying pricing information.
– It seems like that this market
with cryptocurrency and crypto accounting,
especially, when it comes to an organization
and it comes to your assets, it's a very volatile market.
You can just look at the Dogecoin
how it had a huge rise and then a huge fall.
What advice would you give to organizations,
as they're looking to get into this
and they're wading these waters?
Are there questions that they should be asking themselves
and their teams, they should be asking themselves
and their stakeholders before they get into this.
– Yes, absolutely, I mean, certainly, having the infrastructure in place
to be able to handle the accounting.
Whether that's having the right individuals on your staff
or finding the right partners to outsource the accounting to.
That's going to be critical because there, certainly,
are firms that do have the experience
that would be able to properly support that.
Understanding these assets.
Understanding the nature of the transactions that are taking place,
but also what's underlying these different assets.
What are the technologies involved
and getting a better understanding of what they really are.
Versus just the speculative nature of investing
in a specific coin or token, that's definitely going to be critical.
But then also, as we were discussing,
having a system in place.
If you're just dipping your toe in the water here,
and it's going to be really low in transaction volume
and maybe it's just an initial investment.
Then perhaps a system isn't quite necessary, yet.
But if this is going to become a part of your operation,
you're going to want to invest in a technology
that's going to ensure that you are
properly accounting for these transactions.
– So as it becomes much more common,
I go back to us talking about somebody just getting into this.
They're "Oh, I just have a few transactions.
I don't need to look into anything too big
because we're just doing one or two transactions."
But if you're saying it's going to
become more common, does that mean that
it could ramp up very quickly for those people?
– Yes, and that's a great point.
And that's something that we do hear
when we're speaking to prospective customers and other companies.
It doesn't take much volume for complexity to really ratchet up.
So while you might be fine in Excel,
for a little while, if you're planning on
staying involved with digital assets
and they're going to become an increasingly
more important part of your business.
It definitely makes sense to start thinking about a solution
that's going to allow you to properly track
and account for those assets in an automated way.
And Excel is a great tool, you can take Excel really far,
but you're still going to have the opportunity for manual error.
And, so, something purpose-built is definitely worth the investment.
– So looking into the crystal ball,
trying to look into the future.
There's been tons of futuristic movies
where "I'll give you 50,000 credits for that."
Those kinds of things, there's so much volatility in this market.
Where do you see things going
as we look into the next five, 10, 15, 20 years?
– Yes, it's an interesting question.
As I said earlier, I believe crypto is here to stay,
and it's going to evolve.
It's going to, probably, look different.
There are going to be assets that are going to go away,
new assets that we haven't thought of, yet, but it's here to stay.
And I think that people are looking to,
with this type of technology, one of the interesting facets
is that you're cutting out the middleman in a lot of ways.
You're speeding up the pace of the transaction.
You have this decentralized concept.
But, really, most people that are serious
about crypto are looking for regulation.
That's something that really needs to happen
so that there is wider adoption.
Once there is regulation in place,
then people are going to become more comfortable
getting involved due to the protections
that are afforded by having regulation.
And, so, I think that we're going to get there on the regulation piece,
and that's going to really increase adoption.
And, so, with that is going to just become this need
to have better processes and systems in place.
To ensure that you're properly accounting for these assets,
which are going to become much more common
on companies' balance sheets.
– So what advice do you have
for accounting and finance teams?
Accounting and finance professionals, listening to this podcast,
they're like, "That's great, Matt,
you've given me some great insight and inputs.
What's next? What next step
should I take so that I can be prepared
for the coming wave of crypto accounting?"
– Yes, I think, just trying to learn as much as possible.
Keep reading, articles are being put out on a daily basis.
There's podcasts like this.
There's no shortage of people that are speaking about it,
just continue to take in the information.
If this is already a part of your operation
and you don't have a proper system in place,
start doing some investigative work there
and feel free to go to our site and take a look at what we have.
I'd be happy to have conversations with folks as well.
Like I said, this is something that's going to be with us,
and education is really critical in proper adoption here.
– I agree, and we'll put some links
in the show notes for today's episode.
So if you want to take a look at some things
that Matt talked about and other things,
please take a look at those show notes.
Matt, thank you so much for coming on the podcast today.
– Thanks for having me, Adam, I really enjoyed it.
< Outro >
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IMA's podcast, providing you with the latest perspectives
of thought leaders from the accounting and finance profession.
If you like what you heard and you'd like to be counted in,
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visit IMA's website at www.imanet.org.