ICAI Flags Need for Accounting Framework for Digital Assets

1. Introduction

The research committee of the Institute of Chartered Accountants of India (ICAI) has issued a report on “Accounting for Digital Assets”. Accounting for digital assets has emerged as a critical area in contemporary financial reporting, driven by the rapid growth of cryptocurrencies, Non Fungible Tokens (NFTs), and other block chain based instruments. In the absence of uniform accounting guidance, significant challenges arise in relation to their recognition, measurement, valuation and disclosure.

The report issued by ICAI, provides an overview of the global accounting landscape for digital assets by analysing prevailing practices under International Financial Reporting Standard (IFRS), Financial Accounting Standard Board (FASB), and Ind AS, while also considering the evolving regulatory framework in India. It addresses key classification and valuation issues, disclosure requirements, and policy considerations, supported by expert insights and survey findings.

2. Background

At present, there is no standalone accounting standard that specifically addresses the accounting of digital assets. Accordingly, digital asset transactions are accounted for by applying existing Generally Accepted Accounting Principle (GAAP) standards, such as Ind AS 2, Inventory, Ind AS 32, Financial Instruments, and Ind AS 38 Intangible Assets. However, these standards do not comprehensively capture the unique characteristics of digital assets.

Broadly, two accounting approaches are evident. The first allows entities to exercise discretion in formulating accounting policies, typically classifying digital assets as inventory or intangible assets. This approach, however, results in limited disclosures, potentially restricting user’s understanding of an entity’s exposure to digital assets. The second approach involves amending or clarifying existing standards to enhance disclosure requirements. While this may improve transparency, it remains uncertain whether such amendments would ensure consistent application across entities, given the diversity of accounting treatments currently permitted.

Further, the option ICAI is looking forward is to develop a specific accounting standard for the accounting of digital assets and liabilities. The introduction of a separate standard would promote consistency in accounting treatment across entities and mandate enhanced and more rigorous disclosure requirements.

3. Objective of Research Committee

The study of research committee aims to address the significant ambiguities and inconsistencies in the current recognition, measurement, and disclosure requirements prescribed under the existing financial reporting standards. Further, it aims to recommend a policy for developing a comprehensive and robust framework for digital asset accounting. The overall objective of research committee is discussed herewith:

(a) Analyse the limitations of existing accounting standard to identify the unique characteristics and economic substance of diverse digital assets

(b) Identify the key challenges faced by accounting professionals and entities in defining, classifying, measuring, and disclosing digital assets

(c) Evaluate the global regulatory and accounting landscape for digital assets

(d) Provide solutions and tailored approach for the accounting treatment of digital assets to standard-setting bodies, regulators and businesses.

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