Senior Manager at KPMG US, Steve Frydrych, dives into accounting for digital assets: from smart contracts to staking.
Olivia Berkman: Students learn a certain amount in school, but this is, as you said, a very new area. So, what are some of the resources that you recommend people use as things are changing in this space, and as people are moving up in their careers?
Steve Frydrych: Well, there's a ton out there. Everyone's coming out with digital asset stuff. Some of the ones that I think are really good: Chairman Gensler at the SEC, he actually taught a course at MIT. And so if you were looking for a high-level graduate course, that's a phenomenal one. It's available on YouTube. It does take some dedication, and there are smaller ones out there.
The New York times did a great segment on digital assets and blockchain technology. More high level, quick read. But KPMG as well, we've got our financial reporting view resources on our website, and we've got a whole site section devoted to digital assets and blockchain technology.
Berkman: I'm glad you brought up blockchain, because that was such a buzzword for me in my previous role as a managing editor for FEI. I know blockchain is fundamental to the understanding of accounting for cryptocurrencies, but does it still get the same attention and buzz?
Frydrych: Definitely. Digital assets are just a subset of blockchain technology as a whole. Digital assets were also the first type of application for blockchain technology. It started Bitcoin. After digital assets and cryptocurrency, we moved along to other smart contracts. That’s what we're hearing a lot about now. So companies are trying to apply this crypto technology, this blockchain technology to other beneficial uses, this distributed immutable ledger.
Berkman: Okay, tell me about smart contracts.
Frydrych: So smart contract, essentially a basic contract, but where you have to follow through, there's no other option. If A, then B. Versus a typical contract, you give me money for some goods. All right, we have to pass that along. We each have to agree, it's a manual process. With smart contract, it'll automatically go through if the conditions are met.
Berkman: We've talked about blockchain, smart contracts. What are some of the other areas that are very important for people coming out of school or in the early stages of their career, as it relates to digital assets, if they are in a finance or accounting role?
Frydrych: Particularly in an accounting or finance role, is understanding how to account for it, which is interesting, because there's no real guidance out there for it right now.
The AICPA has put together a digital asset guide, which provides some guidance on how you should be thinking about it and how you can apply some accounting guidance in US GAAP that does exist, but there's no specific accounting standard codification for digital assets. Accountants don't necessarily like the word creative, but it's being creative about how you apply existing knowledge to a really growing and new subset.
Berkman: That's very challenging, I would think, for you and for those who are tasked with figuring this out without rules. How do you even begin then to really understand how to account for this? Especially for people in finance and accounting, they rely on rules and guidance, and so how does that happen?
Frydrych: Yeah, no, we especially are very rigid. You need to follow whatever the guidance says. But that's what makes it so exciting, right? So when going to digital assets, the first thing to remember is what one of my partners calls “the original sin of digital assets,” they're considered intangible assets. So accounting for them the same way you would as Coca-Cola's formula for Coke. Something that doesn't quite exist, so goodwill, and you amortize that over time and you'll assess for impairment. But that has repercussions to not just how you account for and value the actual digital assets itself, but there are other issues out there like staking is getting very popular now, especially as Ethereum's moving to Ethereum 2.0.
With staking, you'll get rewards. So money deposited into your wallet after a set amount of time. It's like, ‘Okay, so how do I actually account for this? Is it interest? Is it revenue?’ Once you've decided, ‘Okay, it is revenue,’ then what guidance accounting topics within the revenue recognition guidance would actually apply to digital assets? You'd have to go into intangible assets, see what the guidance is for... It's going to give you examples for patents and goodwill. ‘How would I apply this in these specific facts and circumstances?’ So, yeah, I mean, there’s not a lot of guidance out there, but it's exciting because you're creating guidance.