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How Digital Assets Are Reshaping Accounting

November 9, 2020

Did you know that the global Digital Asset Management (DAM) market is set to grow to $6.9bn (£5.2bn) by 2024?

A digital asset can be categorised as anything that exists in a binary format and comes with a right to use attached. The growing popularity of different forms of digital or cryptocurrency assets has meant that CPAs across the globe have had to consider how to appropriately account for them.

Use this guide to learn about digital asset management, and discover how digital assets are reshaping accounting practices in modern firms.

What Are Digital Assets?

Data that doesn’t possess a right to use isn’t normally considered a digital asset. 

Examples of digital assets include: 

  • electronic documents
  • audible content
  • video
  • graphics and illustrations
  • spreadsheets
  • emails
  • any other relevant digital data that’s currently in circulation online

Cryptocurrencies like Bitcoin are also classed as digital assets, as they’re a form of digital cash based on a network that is distributed across a large number of computers and devices.

The number digital assets are exponentially increasing due to the rising number of devices that act as a conduit for the different types of digital media. Due to the relentless growth of software applications and diverse user touchpoints across technologies, the total digital asset universe continues to expand.

How Does Storing Digital Assets Currently Work?

With digital content produced at a rapidly increasing rate, Gartner predicts that by the end of 2020 90% of businesses will run into bottlenecks based on the way that they handle and manage their digital assets. 

On top of that, in a world where cybersecurity hacks are happening more frequently than ever before, it’s essential that brands and businesses recognise the importance of storing their digital assets and files securely. One alarming statistic claims that as many as 41% of companies have over 1,000 sensitive folders open to everyone, indicating almost a quarter of files aren’t protected in any way.

Currently, storing digital assets properly isn’t treated as an urgent priority by all enterprises. That said, 84% of all businesses store data or backups in the cloud, with an added 8% making plans to improve their digital asset management within a year.

Digital Asset Management: How To Protect Digital Assets

In order to protect your business and your bottom line, you’ll need to take steps that ensure your digital assets are kept safe and secure. Here’s how to protect your organisation’s digital assets:

  • Make a list of all of your company’s digital assets. Before you can protect your digital assets, you first need to identify what they are. Everything from your company website, customer and client information, intellectual property, to cryptocurrency can be considered digital assets.
  • Secure your company WiFi. Wireless internet is an essential part of modern businesses today, meaning it’s important to follow WiFi security best practices to ensure your digital assets are safe. Take advantage of the option of encrypting your data if that’s available.
  • Limit access to assets, documents and files. Realistically, not all of your staff need access to every document or file within your company’s asset database. Take the time to access applications to the employees who need to use them.
  • Educate your staff on secure best-practices. Ensure that your employees receive appropriate training that helps them understand cybersecurity best practices when using electronic devices and accessing certain applications. Employee education is a large part of protecting your company’s digital assets now and into the future.

Consider investing in cyber insurance. Cyber insurance helps protect your organisation against threats from online risks. Investing in cyber insurance can make all the difference when it comes to bouncing back after a hack or data breach.

Why Digital Asset Management Is Important In Modern Accounting

With a growing number of businesses beginning to accept cryptocurrencies as a form of payment in addition to more traditional methods like cash and credit card, modern accounting must adapt to keep up with the times. 

Increasingly, CPA firms are expected to properly account for digital cash transactions in financial statements in order to balance the books. But, since the Financial Accounting Standards Board (FASB) hasn’t yet outlined or classified specific-cryptocurrency Generally Accepted Accounting Principles (GAAP) this creates challenges for accounting professionals.

How Digital Assets Are Reshaping Today’s Accounting Landscape

Digital assets like crypto cannot yet be classified as cash or cash equivalents on financial statements since they’re not backed by a sovereign government or considered legal tender anywhere in the world. 

On top of that, cryptocurrency cannot be classified as a financial instrument or a financial asset because they’re not cash. For that reason, CPAs are left with little alternative under the current system to categorise cryptocurrencies as intangible assets with indefinite life

The key goal of accounting financial statements is to create an accurate and objective picture of a business’ financial situation, but because of their high volatility in value, financial actors believe that crypto assets are comparable to derivatives and should be measured at fair value through profit or loss.

Unfortunately, by qualifying cryptocurrency as intangible assets this approach fails to communicate the high liquidity of crypto assets. This means that current CPA practices lead to an understatement of crypto assets and obstructs businesses from accurately showcasing the true value of their digital assets on their financial statements.

It’s clear that the accounting industry isn’t yet fully-baked when it comes to digital asset management. In the meantime, modern businesses must recognise the importance of protecting all of their digital assets until accountancy practices adapt to properly handle digital cash assets.

Stay Ahead of the Curve with INAA

We’re the International Association of Independent Accounting firms, established over 25 years ago to facilitate cross-border business.

Here at INAA, we connect accounting firms who aim to deliver quality professional services around a shared vision to make global business personal, and take personal business global. With every industry change our collaborative association of international businesses is committed to being a part of the conversation around digital assets and evolving accounting trends.

Join today to start building powerful business relationships.