< Intro >

– Welcome back to Count Me In.

The podcast about all things affecting

the accounting and finance world.

In today's episode we explore
the world of crypto accounting

with Matt Druckman, currently,

the Vice President of Business
Development at Soft Ledger.

A company focused on helping
companies get their data faster.

Despite the existence of
non-authoritative guidance,

there is still no clear framework
for crypto accounting.

The lack of clarity is due to the,

constantly, evolving nature
of digital assets.

Which are not easily categorized

within traditional accounting practices.

Join us as we navigate the
Wild West of crypto accounting

and discuss best practices
for accounting,

in this rapidly changing field.

< Music >

Matt, thank you so much for coming

on the Count Me In podcast today.

I'm really excited to be talking
to you about crypto accounting.

And, as everybody knows, Bitcoin
has been around since 2008.

But when you look at the
authoritative guidance

there is none, it feels like the Wild West.

And maybe, as an expert in the field,

you can talk a little bit
about what it looks like

to be in the crypto accounting space.

– Great, thanks so much
for having me on, Adam.

Happy to get into this a little bit with you.

You're exactly right, there is not

authoritative guidance, yet, on the topic.

What we have is
non-authoritative guidance.

We have this framework of
best practices and opinions,

that have been pulled together
that folks are following.

There's a really good practice aid
that the AICPA put out on accounting

and auditing digital assets, and
that's proven to be very helpful.

But there is not this authoritative

framework for people to follow.

So everyone's still figuring this out

and the nature of crypto,
and digital assets,

and their evolution is
it's this breakneck pace.

Things are changing
on a daily, weekly, basis.

So there's, definitely, a need
and an increased vocalization

to have this guidance in place.

And it does look like the FASB

is really starting to take
a harder look at this,

we'll probably get into it a little bit later.

but there's been some momentum,

recently, specifically, in October,

but right now it's still early days.

– So when we think about accounting.

It's been the same since the 15th century,

when the first accountants
came into place

and they were writing their entries.

The accounting has pretty
much been the same at its core.

And when you look at digital assets,

they don't really fit that core.

And, so, what does that look like,
especially, prior to this FASB vote

that happened in October of 2022?

– Yes, it's a great point.

And, so, you have this new asset class,

digital assets, come into play here,

and we need to figure out
a way to account for them.

And, I think, that's where some of this

complexity has really arisen, is trying
to figure out where to put these.

And then once you put them there,

what guidance are we following?

And there, probably, isn't a one-size-fits-all

and that's what's happened.

And, so, currently, or prior to this vote,

digital assets, for the most part,

were treated as intangible assets,

and following the guidance
within ASC 350.

And, so, as a result,
you also need to follow

the impairment guidance that exists,

and it doesn't quite match up
with the economics

of what's taking place
with a lot of these assets.

Where you have these
very active markets,

readily available prices.

And, so, the idea of marking down
an asset, impairing an asset,

when there is an event,
which would theoretically

be anytime the price drops below cost.

You're never going to be
able to write that backup.

And that just doesn't quite make sense,

in terms of how people
are viewing these assets,

and how they're using them,

and they're leading to
some very material impacts

on financial statements.

And, so, that in and of
itself is an area that people

have been very vocal about,

and trying to take a better look
at how these should be classified

and updating how we're
accounting for them.

– So, Matt, are there any
more complexities

that accountants have to be aware of,

as they're really getting into the nuts

and bolts of this accounting?

– Yes, the cost basis piece
is definitely a tricky one

that we've addressed, and that
can present a lot of issues,

especially, with higher volumes.

But another one that should be known

is just the accessing and
making sense of your data.

It sounds like something
that should be so simple.

You have this series of transactions

that are taking place on an exchange,

or within a wallet, or on a blockchain.

And you're just assuming that you
can pull that data down, easily,

and it's all going to make sense,

and everything's going to be nicely
categorized and classified

the way you want to see it.

And that's really just not the case,
at least, not in all cases,

some have better data
outputs than others.

But, especially, as you start to get
into more complex transactions

and, maybe, you're getting more involved
in DFI's, or dealing with NFTs,

or just different less-plain
vanilla transactions, if you will.

Being able to make sense of the
data that you're pulling down,

and tag that properly, and ensure that

that's going to be getting into the system

in a way that you want to report on it.

It can be a bit manual.

There could be a process
that needs to take place,

to make sure that you're
properly categorizing everything

and getting it into the system.

It's not just going to pop out of
an exchange or another data source,

and everything's going to
be nice and neat.

So I think that going into it,

knowing that there's going to
need to be some work there

and probably some processes
that need to be ironed out.

Certainly, if you have
maybe a little bit more

of a sophisticated operation,
and you're capable of putting

a business logic layer on top of that data

before it gets into your platform.

A system like ours, like Soft Ledger,
that's programmable via API,

that's one way that data
could be ingested.

So there are some things
to help automate that

and smooth that process,
but it can be a bit manual.

I would think that in the future,
as there's more regulation

and more of an impetus
to standardize data.

That should improve, and maybe
there'll just be better tools,

if nothing else, to help scrape that data

and give you what you need, but
just something to be aware of.

And, so, I guess, when we're talking
about what crypto accounting

or accounting for digital assets,

at the end of the day, it's still accounting.

You're still going to be
booking debits and credits.

The complexities, a lot of them

lie in the fact that there are
a lot of new terms.

There are new terms being used
that we're not familiar with.

People are learning about blockchains,
and NFTs, and DFI protocols.

And what it really comes down
to is getting more familiar with

what's really taking place
with these transactions.

Understanding the nature
of these transactions.

How they, ultimately, need to
be classified and presented.

And I think that, on top of that, there's just

the inherent complexities

that come with dealing
with a volatile asset

and high volumes of transactions,

if that's the case for your business.

That are going to present
some difficulties and, thankfully,

there are systems out there
that are specifically designed

to help automate some of
these processes, and remove

some of the manual, cumbersome,
elements that come with needing

to track and calculate cost basis.

But, ultimately, we are still
accounting for assets

in the way that we are familiar with.

– So do you think that this FASB vote

will help bring us towards some guidance

or something to help accountants,
in organizations, get to a place

where they can set that value properly?

– Yes, it really looks like things
are moving in the right direction

and these things are never fast.

But just based on when this was taken up,

in May, and where we are right now.

On October 12th, the FASB voted
to start treating these

under the guidance of
Fair Value at ASC 820.

So rather than as intangibles where
you're impairing these assets,

you'd be marking to market.

And, so, of course, this isn't
going to cover all digital assets.

Initially, it was thought that

maybe this would just
be Bitcoin and Ethereum,

but it looks like it's going to
be broader than that.

And, I think, that this is really welcome,

and more in line with how people

are viewing and using these assets.

– So as people are continuing
to use these assets,

it makes me think of
your typical ERP system.

It doesn't seem like those ERP systems

were created with the ability to support

these types of assets
because of the volatility.

I know in our talks, before this, we were
talking about how, sometimes,

you have to go to eight decimal
points with cryptocurrencies.

How are major organizations
handling that?

– Yes, it's a great question, and
there's a software component

and then there's just a human
capital component, as well.

I mean, this is all new, for the most part.

I know it's been 14 years or whatnot,

as we said at the beginning.

But still, in terms of where things are

from an adoption standpoint,
and from just an experience

and exposure standpoint, for a lot
of accountants, it's very early.

So you have that component.

You also have the fact that
a lot of these crypto businesses,

they're very early stage.

They're not going to have, in many cases,

an accounting or finance department.

Let alone one that's filled with
experienced, X big-four, auditors.

So there's a lot that is still up
and coming on that front.

But from an ERP and system
perspective, yes, you're exactly right.

These systems weren't designed
to handle digital assets.

This technology, these assets, didn't exist

when these systems were created.

And, so, you can bump into these issues.

The first one being that
you're going to need

to have a separate, call it crypto tool,

to track your crypto activity

and then integrate that with a system

that wasn't specifically
designed to handle crypto.

So there are issues that are going to exist

within that ERP, such as
we refer to coin support.

Are they going to be able to represent

that specific asset in the system properly?

To your point, on decimal precision,
a lot of these assets you need

to be able to go out eight decimal points.

Is that going to be a problem in a system

that wasn't designed
to handle digital assets?

So there are a few points in the process

where things can break down
and necessitate work-arounds.

Chief among them is needing
to have this integration

between a crypto tool and an ERP system,

and that's something that
we, specifically, address,

in the fact that at Soft Ledger,

we are a full-featured,
cloud accounting platform,

but we're also crypto native.

And, so, for us, it's a sub-ledger
and we don't suffer from issues

with coin support or decimal precision.

Everything's neatly stitched
together in one system.

So you have this very controlled

and auditable way, to go
from crypto transaction

to financial statement impact.

– Do you think that there is a gap
in knowledge within the accounting

and finance team, within organizations?

Is there a gap in the competencies

that they're missing in
understanding what crypto is?

And I even think back to even colleges,

are colleges catching up to training

the next level of accountants

so that they can be in this world
where crypto is a thing?

– Yes, absolutely, I think
that any gaps, really,

they're resulting from a couple of things.

It's the fact that, again, this
is new but more important,

coming back to what we were discussing,

at the beginning of the show,

that authoritative guidance
doesn't exist, yet.

So I think that once we get
this hammered out,

then it's going to become a lot easier

to really embed this into the accounting

curriculum that's taking place.

But this is absolutely something
that's being discussed,

at this point, because it's here

and it's on corporate balance sheets,

and it's going to continue
to be an asset class.

It's going to change, I'm sure,
and some of the digital assets

we're talking about won't be around.

But as a whole, this technology,

this is going to be a part of our future

and we're going to need to be
spending the time

educating people on how
to properly account for it.

– So it's almost like we need to educate

our accounting and finance team,

but also find partners such as Soft Ledger

or other crypto accounting softwares,

that can help your accounting team

get to a place where
they're able to do this.

– Right, there's plenty that's been written,

but there's much more to come.

And I think that having
these conversations,

having the platforms in place,
is certainly a really helpful piece

because there are just inherent
complexities beyond just the guidance.

Issues we've discussed with
actually tracking and accounting

for these assets that present themselves,

that can be really quite cumbersome.

So I think that having
not only the coursework

and bringing this into the classroom,

and having well-developed guidance,

but there's just going to be
this need to continue

to have these other forums
and places for people to go

and learn about this
ever-changing landscape.

Because that is really one
of the other real tricks to it all,

is that a transaction that exists this week,

that's novel, that's not going to
be so novel next week, perhaps,

it's just a really evolving space.

And keeping up with the
different types of transactions.

and understanding what
the nature of those transactions are.

and how to properly treat them,

it's something that you need
to stay on top of.

– So as you work with accountants

and accounting teams,
in your organization.

What are some of the bigger pain points

that you're seeing that they're having,

as they're trying to work through

these different issues
we've been discussing?

– Yes, it's a great question.

A pain point that, consistently, comes up

is tracking and calculating cost basis.

That is something that is always difficult,

especially, at higher volumes,
depending on your operation.

Once you start to have any volume,

keeping track of all of
your cost layers, in Excel,

can start to become quite cumbersome.

High volume combined
with a volatile asset class,

constantly, fluctuating prices, it can
really lead to a nightmarish situation

when it comes to actually determining

what the cost basis is
on a given transaction,

so that you can appropriately
calculate a gain or a loss.

So, at a certain point, and that
point usually arrives pretty quickly.

You're going to need a system

that's going to enable you
to do that properly,

and relieve that component from
the accountant's day-to-day

because it really is a
cumbersome process.

And, so, from a calculating
your cost basis perspective,

according to the practice
aid I mentioned earlier.

You're going to want to use a reasonable

and rational method is what
they refer to as the cost method

that should be selected.

FIFO is what we see most commonly

and that is considered a
reasonable and rational method,

and that would be what
you would be using

to calculate the cost basis
on a given transaction.

Other methods we do hear about,

and there's definitely a number of folks

that are interested in weighted average.

We certainly hear people discuss LIFO

and sometimes HIFO —
Highest-In, First-Out.

There are clearly some tax
advantage reasons behind that

but the guide, and the
current best practices

to use a reasonable and rational method

and FIFO seems to check that box.

Another complexity that can, sometimes,

arrive is just finding the principal market

in terms of pricing information
and that's not a difficult thing

when you're talking about BTC or ETH,

or some of these high-volume assets.

But more thinly traded assets, it can
be maybe more challenging

to identify that principal market

in terms of identifying pricing information.

– It seems like that this market

with cryptocurrency
and crypto accounting,

especially, when it comes
to an organization

and it comes to your assets,
it's a very volatile market.

You can just look at the Dogecoin

how it had a huge rise
and then a huge fall.

What advice would you
give to organizations,

as they're looking to get into this

and they're wading these waters?

Are there questions that they
should be asking themselves

and their teams, they should
be asking themselves

and their stakeholders
before they get into this.

– Yes, absolutely, I mean, certainly,
having the infrastructure in place

to be able to handle the accounting.

Whether that's having the right
individuals on your staff

or finding the right partners
to outsource the accounting to.

That's going to be critical
because there, certainly,

are firms that do have the experience

that would be able to
properly support that.

Understanding these assets.

Understanding the nature of the
transactions that are taking place,

but also what's underlying
these different assets.

What are the technologies involved

and getting a better understanding
of what they really are.

Versus just the speculative
nature of investing

in a specific coin or token, that's
definitely going to be critical.

But then also, as we were discussing,

having a system in place.

If you're just dipping your toe
in the water here,

and it's going to be really
low in transaction volume

and maybe it's just an initial investment.

Then perhaps a system
isn't quite necessary, yet.

But if this is going to become
a part of your operation,

you're going to want to
invest in a technology

that's going to ensure that you are

properly accounting
for these transactions.

– So as it becomes much more common,

I go back to us talking about
somebody just getting into this.

They're "Oh, I just have a few transactions.

I don't need to look into anything too big

because we're just doing
one or two transactions."

But if you're saying it's going to

become more common,
does that mean that

it could ramp up very
quickly for those people?

– Yes, and that's a great point.

And that's something that we do hear

when we're speaking to prospective
customers and other companies.

It doesn't take much volume for
complexity to really ratchet up.

So while you might be fine in Excel,

for a little while, if you're planning on

staying involved with digital assets

and they're going to
become an increasingly

more important part of your business.

It definitely makes sense to start
thinking about a solution

that's going to allow you to properly track

and account for those assets
in an automated way.

And Excel is a great tool,
you can take Excel really far,

but you're still going to have
the opportunity for manual error.

And, so, something purpose-built is
definitely worth the investment.

– So looking into the crystal ball,

trying to look into the future.

There's been tons of futuristic movies

where "I'll give you 50,000 credits for that."

Those kinds of things, there's so
much volatility in this market.

Where do you see things going

as we look into the
next five, 10, 15, 20 years?

– Yes, it's an interesting question.

As I said earlier, I believe
crypto is here to stay,

and it's going to evolve.

It's going to, probably, look different.

There are going to be assets
that are going to go away,

new assets that we haven't
thought of, yet, but it's here to stay.

And I think that people are looking to,

with this type of technology,
one of the interesting facets

is that you're cutting out the
middleman in a lot of ways.

You're speeding up
the pace of the transaction.

You have this decentralized concept.

But, really, most people that are serious

about crypto are looking for regulation.

That's something that
really needs to happen

so that there is wider adoption.

Once there is regulation in place,

then people are going to
become more comfortable

getting involved due to the protections

that are afforded by having regulation.

And, so, I think that we're going to
get there on the regulation piece,

and that's going to
really increase adoption.

And, so, with that is going to
just become this need

to have better processes
and systems in place.

To ensure that you're properly
accounting for these assets,

which are going to become
much more common

on companies' balance sheets.

– So what advice do you have

for accounting and finance teams?

Accounting and finance professionals,
listening to this podcast,

they're like, "That's great, Matt,

you've given me some
great insight and inputs.

What's next?
What next step

should I take so that I can be prepared

for the coming wave
of crypto accounting?"

– Yes, I think, just trying to learn
as much as possible.

Keep reading, articles are being
put out on a daily basis.

There's podcasts like this.

There's no shortage of people
that are speaking about it,

just continue to take in the information.

If this is already a part of your operation

and you don't have a
proper system in place,

start doing some investigative work there

and feel free to go to our site
and take a look at what we have.

I'd be happy to have
conversations with folks as well.

Like I said, this is something
that's going to be with us,

and education is really critical
in proper adoption here.

– I agree, and we'll put some links

in the show notes for today's episode.

So if you want to take
a look at some things

that Matt talked about and other things,

please take a look at those show notes.

Matt, thank you so much for
coming on the podcast today.

– Thanks for having me,
Adam, I really enjoyed it.

< Outro >

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