Tokenised assets: why standards alone won't save the audit file

That may sound subtle. In an audit file, it is not.

The collectible that is not a collectible

Consider a token marketed as a “digital collectible”. The dashboard shows images, serial numbers and marketplace activity. At first glance, the position appears straightforward. Now assume the token terms also grant the holder a contractual entitlement to a proportionate share of the licensing revenue generated by an underlying intellectual property portfolio. The question immediately changes. Is the holder primarily holding a digital collectible? Or is the holder participating in a future income stream generated by another party?

A legal adviser may focus on contractual rights and obligations. An accountant may focus on recognition, measurement and disclosure. A tax adviser may focus on the character and timing of income. Each analysis may be technically defensible. Yet if each discipline begins from a different implicit understanding of what the token position economically represents, the file may contain three coherent analyses describing three different assets.

The issue is not whether each conclusion can be defended in isolation. The issue is whether the audit file can demonstrate that all conclusions relate to the same documented economic function.

Why this matters in Australia

This matters in Australia because there is currently no dedicated AASB standard for tokenised assets. In practice, preparers generally look to existing standards such as AASB 138 Intangible Assets or, where assets are held for sale in the ordinary course of business, AASB 102 Inventories. The IFRS Interpretations Committee’s 2019 agenda decision provides useful direction for holdings of cryptocurrencies without underlying contractual rights.

However, many tokenised assets are designed precisely to create economic rights, contractual claims, governance rights or revenue-participation mechanisms. As a result, professional judgement remains necessary. That judgement becomes difficult if the economic character of the position has not first been established. When a standard is selected by analogy rather than direct prescription, the quality of the accounting outcome depends heavily on the quality of the underlying economic analysis.

Economic function comes first

Before asking how a token position should be reported, measured or taxed, accountants should first determine what economic position the entity actually holds. What risks and rewards is the entity exposed to? What economic benefit is expected, and what drives value? Who controls the position? Where does the economic return come from? Who is the counterparty, if any? Can the entity enforce its position, or is it merely exposed to a platform arrangement?

Only after those questions are answered should the legal analysis begin. Only then can the accounting treatment be selected and tested. Only then can the tax consequences be assessed coherently. The sequence matters because each stage depends on the one before it.

Process risk, not just classification risk

In traditional transactions, economic function and legal form are often closely aligned. With tokenised assets, that alignment is less obvious. Similar economic positions can be wrapped in different technical structures. Conversely, identical-looking tokens can create very different rights, obligations and exposures.

The bigger risk is therefore not occasional misclassification. It is a process in which different disciplines start from different assumptions, leading to inconsistencies throughout the file.

An audit file should not merely contain conclusions. It should demonstrate the route to those conclusions. If a file cannot explain the economic function of a token position before explaining how it should be reported, there is a risk that the accounting treatment rests on assumptions that were never properly tested.

Accounting standards will not save a tokenised-asset file if the economic function has never been established.

The greatest risk with tokenised assets is not necessarily misclassification; it is beginning the analysis in the wrong place.

Dave Coenen is a Dutch chartered accountant and researcher specialising in the legal, accounting and tax treatment of tokenised assets.