By CA. Pradeep Sriram

Cryptocurrencies are a vast and growing field.  Accounting for cryptocurrencies is a diverse and complex topic with many nuances centered around cryptographic assets, accounting for initial coin offerings, accounting for cryptocurrency miners, accounting for cryptocurrencies held on behalf of third parties, etc.  This article focuses on the fundamental principles of cryptocurrency accounting applicable in most standard use cases. 

The Oxford Dictionary defines ‘cryptocurrency’ as ‘a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank’.  There is no legal definition of cryptographic assets. It is important to note that there are various subsets of cryptographic assets. Cryptographic assets are used for a variety of purposes, including as a means of exchange, as a medium to provide access to blockchain-based goods or services, and to raise funding for an entity developing activities in this area.

History of Accounting for Cryptocurrencies:

While Cryptocurrencies have been around for more than a decade now and have proliferated rapidly, they first caught the attention of the standard-setting bodies and regulators after a landmark ECJ ruling in October 2015.  On 22 October 2015, the ECJ issued a landmark ruling on the digital currency known as Bitcoin. While the subject matter of the case and the ruling was not directly related to the legitimacy of Bitcoin as a ‘currency’ or the accounting aspects of the same, the ruling was a watershed moment in many ways.  While we will not go into the details of the case and the judgment, suffice to state that the ECJ acknowledged Bitcoin as a ‘currency’. (Note:  Currencies, Cash & Cash equivalents have a different connotation under Accounting standards, and cryptocurrencies do not qualify as one – Explained later in this article)

ECJ Judgment paraphrased below:

The ‘bitcoin’ virtual currency with bidirectional flow, which will be exchanged for traditional currencies in the context of exchange transactions, cannot be characterised as ‘tangible property’… given that, as the Advocate General has observed… that virtual currency has no purpose other than to be a means of payment.”  

This innocuously worded paragraph embedded deep within a voluminous judgment offered a precedent for regulators worldwide and clarified any doubts regarding the legitimacy of cryptocurrencies like Bitcoin.

It was almost a year after this judgment, in December 2016, that the Accounting Standards Advisory Forum (ASAF) of the IASB held its first meeting on the topic.  The first thought paper around accounting for cryptocurrencies was pioneered by AASB (Australian Accounting Standards Board) led by Henri Venter.  Things then moved rapidly culminating with an IFRIC meeting decision in June 2019.

IASB was presented with options to address the problems.  The options inter alia were:

• Issue a new IFRS.
• Amend the definition of cash or cash equivalents.
• Amend the definition of a financial asset. 
• Amend the measurement guidance in IAS 2 and IAS 38

Considering the advantages and disadvantages of different options, IASB decided to go ahead with an IFRIC guidance on accounting for digital currencies with specific measurement guidance around IAS 2 and IAS 38.

What Cryptocurrency is not:

An impulsive accounting approach during the initial years when cryptocurrencies were introduced, was to treat cryptocurrency as a financial instrument/currency/cash (as the ECJ judgment also did, though the context was different) and apply the relevant standard on financial assets.  However, cryptocurrency fails the most important test required to qualify as a financial asset – it is not backed by a contract.  There is no contractual right to receive cash or another financial asset in exchange for cryptocurrencies.

Currency (cash) is a financial asset because it represents a medium of exchange and is therefore the basis on which all transactions are measured and recognised in financial statements.  A cryptocurrency fails this important criterion – It is still not ‘widely’ accepted as a medium of exchange, nor is used as the monetary unit in pricing goods or services to such an extent that it would be the basis on which all transactions are measured and recognized in financial statements – the pricing is usually done in “normal” currency and then pricing in cryptocurrency is derived from regular currencies.

The IFRIC judgment of June 2019 proffered guidance for accounting for cryptocurrencies on the following lines:

Step 1:  Are the cryptocurrencies held for sale in the ordinary course of business / in the process of production for such sale / as materials or supplies to be consumed in producing goods / rendering services.

IAS 38 – Intangible Assets

Intangible Assets are defined as ‘an identifiable non-monetary asset without physical substance’.  An asset is identifiable if it is separable or arises from contractual or other legal rights. An asset is separable if it ‘is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability’.  IAS 21 The Effects of Changes in Foreign Exchange Rates states that ‘the essential feature of a non-monetary item is the absence of a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency’.

A cryptocurrency meets the definition of an intangible asset in IAS 38 on the grounds that (a) it is capable of being separated from the holder and sold or transferred individually; and (b) it does not give the holder a right to receive a fixed or determinable number of units of currency.

IAS 2 – Inventory

IAS 2 applies to inventories of intangible assets. Paragraph 6 of that Standard defines inventories as assets:

1. held for sale in the ordinary course of business;
2. in the process of production for such sale; or
3. in the form of materials or supplies to be consumed in the production process or the rendering of services.

An entity may hold crypto-currencies for sale in the ordinary course of business. In that circumstance, a holding of crypto-currency is inventory for the entity, and, accordingly, IAS 2 applies to that holding.  There is a special exception given to a broker-trader of crypto-currencies. Commodity broker-traders can measure their inventories at fair value less costs to sell as the crypto-currencies are principally acquired with the purpose of selling in the near future and generating a profit from fluctuations in price or broker-traders’ margin.

Crypto-assets are proliferating rapidly and many large publicly traded companies have Bit-coin on their Balance sheets today.  Fortune 500 companies including the likes of Microsoft have started accepting Bit-coin as a form of payment.  The IFRIC guidance is very recent and offers clarity on accounting for crypto-currencies in a uniform, consistent and comparable manner.  Users of financial statements are very keen to understand the assumptions, risks, materiality, and judgments involved in recording and reporting crypto-currency transactions.  In the coming years, crypto-currency accounting could evolve into an independent accounting standard with detailed recognition/ de-recognition rules, measurement criteria, and disclosure requirements.

The author is a member of ICAI and can be reached at psrcpa1@gmail.com.

Sources:

www.ifrs.org

The ECJ’s First Bitcoin Decision: Right Outcome, Wrong Reasons?

CA Rishikesh S Ketkar

Central banks around the world are working round the clock to keep their interest rates as low as possible and flood the markets with money supply each passing day. One can only wonder when this helicopter money endemic will come to an end and real wages every keep pace with asset bubbles being created by all the transient money that is being printed.

Markets have come a long way since the Global Financial Crises (GFC 2008). Back then, Quantitative Easing (QE) was perceived as a once off lifebuoy event for sinking financial markets. Since the GFC, financial markets have seen progressive rounds of QE viz. QE2, QE3 and so on. 

The once off lifebuoy event has now become a way of life for financial markets. Our minds have been progressively conditioned into accepting the fact that robust financial markets exist because of QE. Even the slightest mention of any QE tapering would cause great imbalance in present day markets, let alone any decision to taper or turn the money tap off. Turning the reserve bank’s money tap off would invite doomsday much sooner. 

We seem to have reached a stage where reserve banks across the world appear to have lost the ability to think of any other unique and permanent solution as an alternative for their self-created monster, ‘Helicopter money’.

The quantum of QE since the GFC can be judged by the fact that US government debt pre GFC in 2007 was around US$9 trillion, this is now nearing US$28 trillion as of January 2021. This is an astonishing 300% increase in 13 years. Globally, government debt is a gargantuan US$278 trillion.

So, when do we conclude that the global government debt level is too high? Maybe at US$500 trillion or might be US$1 quadrillion. Our crystal ball does not have a definitive answer for this question!

Well, now is not the time for sure to label debt as ‘too high’, if we were to read the opening statement of Hon. Janet Yellen before the Senate Finance Committee in USA: “Neither the President-elect, nor I, propose this relief package without an appreciation for the country’s debt burden. But right now, with interest rates at historic lows, the smartest thing we can do is act big”. Sounds like the money printing press will continue to remain hot for many more years.

Our present-day world just needs a reason to print more money. Any reason will do. The reason in 2008 was the GFC, in 2020 it was the pandemic, in 2021 it might be another war and in 2030 it might be a foreseeable collapse of the oil industry.

Having said that, it is an undeniable fact that several million small and medium businesses have been saved from going bankrupt during the pandemic thanks to all the timely money supply and support extended by reserve banks and governments across the world. These businesses would just not have survived the pandemic related market crash had it not been for the timely support and money printing measures (read debt) taken up by governments around the world. In Australia schemes like JobSeeker, JobKeeper and JobMaker assisted businesses, workers and families in time when they needed it the most. 

The various stimulus measures undertaken by the Australian government have indeed made us Australians proud to be a part of ‘The lucky country’ as we gradually recover from the pandemic in much better shape compared to most other countries around the world.

While governments remain busy framing and enforcing ‘responsible lending rules’ at the retail end of the financial markets, we are yet to witness ‘responsible borrowing rules and limits’ that mandate what levels of debt should a government be content with. The absence of ‘responsible borrowing rules and limits’ for government debt are promoting governments to take on more debt and eventually pass the mantel to the next government incumbent after every few years.

But the omnipresent issue of high debt level prevails. Government debt has been and continues to be too high. Add to this the joy of interest payment burden attached with every dollar of debt issued. A fundamental part of issuing these high levels of government debt and being able to continue to print trillions of dollars is to keep the cost of debt manageable. Cost of any debt as we know is ‘Interest’.

Welcome to the world of ‘Yield Curve Control’ (YCC) or ‘Yield Curve Management’ (YCM)

YCC is the phenomenon of Reserve bank becoming an active buyer of government securities (G-sec) in primary markets. Reserve bank would normally announce its intention to buy G-sec and set a floor price for G-sec in open market during regular trading sessions. Buying on a massive scale by the reserve bank sends G-sec prices higher. Higher bond prices naturally bring the yield of G-sec lower than what it would normally have been if the reserve bank’s intervention was eliminated.

Thus, lower yield becomes the new normal related to government debt. The ultra-low yield on exchange listed G-sec allows the countries treasury department to issue new debt at these super low coupon rates. Presto! We now have a perfect round robin scheme of issuing successive rounds of QE and progressively lower rates of interest with many countries now regularly issuing negative yield debt.

YCC ensures a long-term artificial market pricing mechanism where the basic feature of price discovery through supply and demand for a security is completely eroded. YCC has also been blamed for breeding traders’ complacency and risk myopia as traders place faith on their reserve bank to actively step in every morning and continue to flood the market with money.

Here is a closer to home example for Australian’s on how YCC works. On 3^rd November 2020 the RBA announced its intention to purchase AU$100bn worth of G-sec over the next 6 months as a part of its quantitative easing plan while setting the interest rate on new drawings from its term funding facility from 0.25 per cent to 0.1 per cent. This was a major announcement. It set the tone for RBA to actively participate in G-sec markets while setting the yield curve across various maturities of debt. 

On 10^th Dec 2020 Australia joined an elite list of countries which issued debt with negative yield. The Australian Office of Financial Management sold March 2021 Treasury notes at -0.01% yield.

On 2nd February 2021 The RBA Governor Philip Lowe, amongst other items, made the following statement: “It (RBA) decided to purchase an additional $100bn of bonds issued by the Australian government and states and territories  when the current Bond  purchase program completed in mid-April. These additional purchases will be at the current rate of $5 billion each week.” That is nearly a billion Australian dollars coming in the markets every weekday! The statement further states “The board remains committed to maintaining highly supportive of monetary conditions until it’s goals are achieved” and that “The board will not increase the cash rate until actual inflation is sustainably within the 2 to 3 percent target range”. Finally it concludes with the following: “The board does not expect these conditions to be met until 2024 at the earliest”. Sounds like a narrative gaining ground here to continue flooding Australian markets with cash till about 2024.

Printing money, issuing debt and yield curve control all go hand in hand to make money printing convenient and inflate the global debt balloon beyond anyone’s imagination. Perhaps the time to begin repaying this debt burden is factored in at the tail end of our next forward estimates.

Our grasshopper colony really does not care about debt levels anymore, so long as the sun is shining, interest rates remain low, markets are flush with funds and stock market hits new records. But there will be a day when it starts to rain. Well, that day major governments will get together and agree to begin another round of quantitative easing and print more money.

About the Author: CA Rishikesh S Ketkar is an economist, writer and speaker who writes about economic issues, monetary policy, economic policy and major trends in financial markets. He can be reached at https://www.linkedin.com/in/rishi-ketkar-b77b136/ or rishiketkar@yahoo.com

Bibliography: http://www.usdebtclock.org, https://www.finance.senate.gov/imo/media/, https://www.rba.gov.au/media-releases, https://www.aofm.gov.au/

Dear Professional Colleague,

It is with immense pleasure that I release the inaugural edition of The Lighthouse, the newsletter of the Australian Chapter of ICAI Sydney, a publication for our members by our members. 

In spite of the global pandemic, I have seen high levels of engagement from our members and I thank you for your support. This newsletter is a further step towards ongoing engagement and supporting each other. I would also like to acknowledge the leaders at ICAI – President CA Atul Gupta and Vice President CA Nihar Jambusaria, ICAI International Affairs Team and all overseas chapters, for their continuous encouragement and motivation. 

What I am most proud of about 2020 is the fact that we conducted more than 20 online events seamlessly and an International conference face to face, with speakers of immense repute. Our community involvement included helping people with financial hardship, bushfire relief efforts and COVID-19 Fund donations. I take this opportunity to thank our sponsors SBI Australia and Silverhall.  

This newsletter would not have been possible without the articles contributed by our members, proof-readers, designers and the end to end co-ordination of our Secretary CA Ankur Chaplot. Well done Ankur for your stewardship and everyone involved. I would like to acknowledge the huge contributions all our volunteers make for the regular functioning of our Chapter.  

Just like a lighthouse is a tower containing a beacon light to guide ships at sea, we hope that this newsletter and the upcoming editions guide you to be the best in your profession. If you have any feedback about this newsletter or want to get involved, please write to newsletter@icai.org.au 

Wish you a healthy and prosperous 2021 – and happy reading!

Regards,

CA Subbu L Subramanian

Chairman, Australian Chapter of ICAI Sydney

A comment from your Property Experts: Silverhall

After 2020, the question on everyone’s mind was how did the property market close in 2020? The answer: Australian property values closed 3.0% over 2020. Keen property enthusiasts, homeowners and investors have already started to make their moves; and the forecasts for 2021 mean they are on the right side of things.

“Housing values continued to rise through the first month of 2021 with CoreLogic’s national home value index up 0.9% over the month. The January movement takes Australian home values to a fresh record high. Housing values have surpassed pre-COVID levels by 1.0%, and the index is 0.7% higher than the previous September 2017 peak.” (Tim Lawless )

Corelogic’s Quarterly Economic Review in December 2020 showed that the downturn was minor and property prices were on the upswing, a trend that has continued in 2021. Head of research Eliza Owen surmises 

“There are numerous factors which have contributed to the prevention of a larger downturn in dwelling values including the institutional, coordinated response to the pandemic, which have seen low borrowing costs, added incentives for first home buyers, and the extension of mortgage repayment deferrals limiting forced sales.”

So, what are the main factors driving growth according to the experts across the country?

Important Research Note: Location is Important

Whilst the term ‘Australian Property Market’ is familiar to everyone, it is largely irrelevant what we need to know, what is happenings in a more specific location. Example, the Sydney CBD is not the same property market as the NSW Central Coast. However, you will hear me refer to the term Australian Property Market as a macro guide. It is very important to dig down deeper to what is driving changes in property values in a particular market. So over to the factors affecting property growth right now:

Supply and Demand

Supply & Demand – it has not changed since time immemorial and times like these highlights this beneficial opportunity for the property sector. 

This is one of the fundamental factors driving growth in any property market, that Silverhall will always guide our clients back to. “With housing activity continuing to rise at above average levels and listing numbers remaining well below average, the natural consequence is upward pressure on housing prices.” (Tim Lawless, CoreLogic Feb 2021). 

Buyer demand is meeting with finding limited supply. This is contributing to upward pressure on dwelling prices. Total dwelling stock on the market finished about 20% lower at the end of 2020 than in the equivalent period of 2019. 7 of our 8 capital cities having significantly less properties for sale than 12 months ago (CoreLogic). It goes without saying, strong demand at a time of limited supply must lead to property price growth. 

Certain markets were already experiencing an undersupply of property in March 2020. One of the results of Covid-19 hitting Australia was financial institutions largely ceasing lending to new property developments or substantially increasing the pre-conditions for projects to commence, such as presales. In many cases both. This only further exacerbated a shortage of property in particular areas. This combined with the migration of people from Covid-19 impacted areas to regional areas has brought about predictable results:  a real strengthening of prices in the market and therefore capital appreciation of property. 

Vacancy Rates

Directly impacted by supply and demand factors, vacancy rates in many key areas are low with an influx of new residents and lifestyle. By way of Example, certain Silverhall selected suburbs below represent a snapshot of the impact the last year has had on many suburbs we identified, with already low vacancy rates. 

Suburbs	Dec 2020	Dec 2020
Hamlyn Terrace	2.6%	0.7%
Ipswich	2.4%	0.9%
Logan Reserve	2.6%	1.0%
Joyner	1.5%	0.6%
Burpengary	2.8%	1.1%

Real Examples from Silverhall Property Management on Tenant Migration

Tenant 1 – Moved from Western Sydney to Lake Macquarie for a new position after their job in Sydney was impacted by Covid-19. New to the area, with an equivalent role to before, they are now enjoying added features such as the lifestyle benefits.

Tenant 2 – A nurse working at Campbelltown Hospital relocated to Gosford Hospital. The location suits them better, rent is less and their own lifestyle more positive.

Government Incentives and Institutional Coordination

These have been a leverage point for Governments in times of economic downturns. Example, NRAS was established at the time of the GFC. Here are the key ones helping to influence demand for property since Covid

• HomeBuilder Grant
• First Home Loan Deposit Scheme 
• State specific First Homeowners Grants
• First home Concessions on Stamp duty

Government stimulus programs and the rise of owner-occupier purchases over 2020 may have contributed to a strong uplift in detached house approvals over the year relative to units (CoreLogic)

• Owner occupiers led a recovery in housing finance lent for the purchase of property over the year, aided by rapid growth in the first home buyer segment, which was up 35.1% in the 12 months to October. (CoreLogic)
• New data released shows as of December 31, 2020, a total of 75,143 applications for the Home Builder Grant had been received. The original estimates were 20,000 new builds and 7,000 major renovations

Regional Growth 

Covid has been a significant influencer on particular regional property markets. People moving away from CBD and built-up areas due to the impact of Covid has increased the demand for property in markets already very tight on supply.

CBD Movement – Activity in thee Australia’s capital city CBDs during January 2021 shows movement levels in the first half of the month are well down on the same period a year ago – by as much as 72% in the Melbourne CBD and 66% in Sydney CBD (Roy Morgan Research 2021). 

Working from home – 4.3 million people (32% of working Australians) have been working from home (Roy Morgan Research). Before the arrangements changes, Covid-19 brought about this was averaging at 20% in capital cities. In NSW, the numbers were higher for WFH, reaching up to 39% during the last year and Queensland following this rising to 27%. The WFH trend has been more pronounced in the Metropolitan areas than outside.

Benefiting from remote working arrangements, internal migration, closed borders and better affordability, regional home prices climbed by 1.58 per cent in January 2021 after December’s 1.63 per cent gain – the biggest lift in 17 years. Prices surged 7.9 per cent in the year to January – the strongest annual growth rate in 16 years. (CommSec’s Ryan Felsman)

There has been a big move to regional areas and house prices are reflecting this change of lifestyle, space and the rise in work from home arrangements 2020 fostered. Industries hit hard by the changes of Covid-19 are not the primary economic forces in these areas. In fact, Covid-19 has increased work opportunities with expansion of certain sectors, including logistics and warehousing, transport, residential construction.

“Better housing affordability, an opportunity for a lifestyle upgrade and lower density housing options are other factors that might be contributing to this trend, along with the newfound popularity of remote working arrangements.” (Tim Lawless)

The key regional market Silverhall has been investing in for several years has continued its rise, especially towards the end of 2020. NSW Central Coast is the leading regional market in Australia. Its proximity to Sydney and key investment commitments in infrastructure of $4 billion prior to 2020 have set it up as a prime location for property and lifestyle. 

Additionally, Silverhall selected areas north of the Central Coast and Greater Brisbane are also benefitting:

• Maitland and Cessnock
• Logan, 
• Moreton Bay
• Ipswich Local Government Areas 

So, what is driving property growth in and around Australia? 

Property growth is happening in Australia, even after the unprecedented year that was 2020. However, it is not all of Australia, but in some areas of Australia. 

Lower listings mean lower supply, creating an unavoidable knock on effect for demand and upward pressure on property prices. Population changes through internal migration, government incentives with lower costs of borrowing have helped demand. They helps in driving growth.

These simple attributes, knowing where to invest remains an important focus on the fundamentals for your property investment strategy. Add into this the rise in confidence and investor market reawakening, the rise in property price in 2021 looks well on its way. 

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