Without a standard framework, how does an international club audit digital assets?

The world's top accounting firm PricewaterhouseCoopers has launched Vulcan digital asset services as early as November 2016, and current digital assets still face many challenges such as categorization, valuation, auditing, and future technology development. In response to these questions, at the HashKey 2019 Digital Assets Global Summit co-sponsored by HashKey Group and the Universal Blockchain Lab, PricewaterhouseCoopers Director Anuj Puri delivered a keynote speech titled "Accounting Standards and Auditing Standards for Digital Assets." .

The following translation from Anuj Puri's speech shorthand, some of which does not affect the original intention of the deletion.

A few years ago, the digital asset industry did not receive effective guidance. Unfortunately, this situation has not changed much. Similarly, audits of digital assets have made limited progress, and there are no clear rules on digital assets in IFRS.

Due to the lack of relevant regulations, we can only follow the general principle, and the same is true for audit work. I have been working in the blockchain for about two years. The problems in this industry are very diverse. When conducting audits, we usually need specific analysis of specific issues. In the absence of relevant guidance and clear regulations, the best way is to communicate relevant audit information clearly and transparently to the public.

Last March, the International Accounting Standards Board (IASB) received advice on whether digital assets could have a standard framework and attracted a lot of attention. In September last year, the IASB invited a committee to discuss this topic, and it is expected that the results will be announced this month (March). Although the IASB will provide some guidance, it is not the standard setting we hoped for. Therefore, the IASB's position is that it will not set standards in the short term.

What I discussed in my speech today is just the tip of the iceberg, the digital asset holder. If you are an investor in digital assets or crypto assets, what does accounting standards mean for you? As a large accounting firm, PWC needs to set very good standards. We have set up an international working group that focuses on digital asset auditing and I am one of them.

For digital assets, we mainly look at two aspects: first, the main purpose of holding digital assets; second, how to obtain their intrinsic value.

Digital assets can be divided into four categories, cryptocurrency, functional tokens, asset-guaranteed tokens, and securities-type tokens. The last two are sometimes interchangeable, but basically this is the four major categories. The Accounting Standards Board focuses primarily on cryptocurrencies and does not provide much guidance on other tokens. Business consultants need to develop the correct accounting standards themselves.

Thinking about digital assets based on different types of assets in the accounting profession, we ask, is it cash? No; is it a financial asset? Not; property? No. Then only stocks and intangible assets are left. But from an investor's perspective, investing in intangible assets is not common.

Any kind of digital asset may belong to one of the above two categories, and the audit work depends on the asset type. Inventories are only applicable to holding digital assets for sale, and the act of capital valuation as a long-term investor may be more appropriate for the intangible asset model.

In the inventory model, fair value auditing is very straightforward because all changes are made through the income statement. When it comes to intangible assets, you can choose either the fair value model or the historical cost. But most companies will prefer a fair value model to describe their financial situation more fairly.

I want to emphasize here that no matter what kind of digital assets are ultimately classified, they do not always exactly match the fair value in the inventory model. There are other challenges in determining asset classification. For example, what is the cost of selling digital assets when the fair value is less than the cost of sales? Not sure. What market prices are used to evaluate digital assets? Again, this is a very challenging issue. What type of approach is used to view digital asset inventory combinations? Follow the weighted average? These are all issues that need to be considered.

Let's talk about the intangible asset model. Intangible assets can only be used when digital assets have an active market. But equally challenging is that not all digital assets have an active market. The second challenge is how to determine the impairment of digital assets. If the market price temporarily falls, does it mean that there should be impairment?

Let's talk about the valuation challenge. This issue has not received enough attention, but it may be a headache. There are some specific rules on how to determine the fair value of an asset. Especially in the case of very active transactions, there are huge challenges in determining the reference price. The market for digital assets is endless. They do not have the closing price of the traditional securities market, but they are going on day and night, and it is impossible to decide what time to close. You have to decide which market to use and the reference price, which is inherently very challenging. There are multiple markets, and we need to decide which market is active and which market is the main market, but it is often not intuitive.

The last point I want to discuss is the audit challenge. As a large accounting firm, we will see these issues earlier. The first major challenge in auditing digital assets is to establish ownership: Who is the holder of the private key? Who can operate the transfer? Is this enough to establish ownership? As an auditing company, in determining whether the entity actually holds these assets, in addition to "Yes, the private key is owned by the company", what evidence? Private keys can be shared among many people, and many people may claim ownership.

In addition, from the point of view of the number of nodes, transaction costs, etc., there are still some factors to consider. Some blockchains are not efficient and there may be delays in the timing of the validation, which makes it difficult to obtain real-time information. Of course, the biggest fear is the fear of the unknown. The blockchain is an evolving field, and the technology is new, and auditors are often skeptical about unknowns and risks.

I would also like to express to you that you should not wait for specific rules or guidance to be released, because there will be no specific guidance in the future. We understand this from internal and IASC discussions. This is a rapidly developing and unpredictable area. I suggest that you communicate with consultants as soon as possible to find the right model.

Finally, to reiterate, communication is the key to understanding and managing the expectations of stakeholders.

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