With bitcoin being declared legal tender in El Salvador and more generally gaining acceptance as a transaction currency across the world, does this cryptocurrency now meet the definition of cash, as outlined by the Australian Accounting Standards Board and other standard-setters around the world?
In Australia, cash and cash equivalents are defined in reporting standards (AASB 107) as the following:
• Cash comprises cash on hand and demand deposits.
• Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk in changes in value.
What is interesting here is that the definition of cash above is quite broad – there are no limitations on what currency this cash may be in – be it the Ukrainian hryvnia, Libyan dinar or Danish krone. Even the Argentinian peso or Turkish lira, with those countries’ currencies rapidly falling in value due to their underlying hyperinflationary environments, meet this definition of cash.
So here is where the bitcoin question becomes troublesome.
Across the world, regulators are wary of entities transacting in bitcoin, and under the definition above, there is broad consensus that a cryptocurrency is not cash per se, principally due to its high levels of volatility but also as it (previously) has not been legal tender of any country.
Now that it is legal tender of a country and thus bypasses the volatility restriction built into the cash equivalents definition, should it now be considered cash under AASB 107?
Some standard-setters have commented on this issue, citing that cash in their interpretation should be readily exchanged for goods or services. But here is where things get murky – I may have $600 Suriname dollars, and I may only be able to purchase goods and services with those dollars only after a long flight to South America. Does this mean that those Suriname dollars are not cash? How can the standard-setters determine which currencies are in and which are out for defining what cash is?
This process could become a political nightmare.
To overcome this, the standard-setters may seek to narrow down the definition of cash with a rules-based approach, perhaps defining cash according to:
• Levels of trade in the currency
• Volatility against established fiat currencies of the world
These, too, would be problematic – as an example, bitcoin is traded far more extensively than many currencies around the world. Meanwhile accounting standard-setters like the International Accounting Standards Board or the US-based Financial Accounting Standards Board (the FASB) are yet to provide any colour on this issue.
Practitioners are now wondering:
• Is there a rebuttable presumption that a currency automatically cash? And if so,
• What circumstances (i.e. trade levels, volatility, underlying inflation) may exist where that rebuttable presumption fails?
The recent development in El Salvador, where bitcoin is now legal tender and a currency highlights that this is an issue that the standard-setters can no longer ignore. For the time being, those entities based in El Salvador using only bitcoin will need to continue to file cashless financial reports under both IFRS and US GAAP financial reporting principles.
Nicholas Benbow is the director, audit and assurance at William Buck.
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