Article written by
DMCL
in the quarterly overview of Canadian news, a newsletter published by
Canadian member firms
of
Moore North America
. This article on NFTs is part of our mission to become the partner of choice for your success by keeping you up to date.
In 2021, a new trend of bidding or buying high-value collectibles known as non-fungible tokens (NFTs) has captured the attention of people around the world. What immediately stands out is the scale of the wealth used to buy these NFTs. In March 2021, for example, the first work of purely digital art (NFT) by the artist (NFT creator) known as Beeple was sold by Christie’s for a record US$69 million. Shortly afterwards, Twitter founder Jack Dorsey (NFT creator) auctioned off his first tweet as NFT for US$2.9 million.
What is an NFT and why is it so popular?
Simply put, an NFT is a unique digital asset that has no tangible existence. This can be a single digital work of art, a digital autograph, images, or several copies of these elements, each copy being individually identifiable. The uniqueness of an NFT is its ability to be independently verified using blockchain technology. NFTs are accompanied by a digital certificate of ownership and, in theory, no one can create a copy or modify them.
Given the unique characteristics of an NFT, you can understand how they would be useful to collectors of “objects” or investors in rare “items”. Instead of a rare stamp or painting that you physically own, NFTs are presented as the digital solution to collectibles.
It is conceivable that, as NFTs become more widespread and accepted, they could appear on balance sheets. This led to some interesting discussions on how to properly account for and value NFTs.
Evaluation of purchased NFTs
Which NFT to buy?
Under Canadian accounting standards for private companies, NFTs meet the definition of an intangible asset with an indefinite life. When an intangible asset with an indefinite useful life is purchased, it is recorded at cost. If circumstances indicate that the carrying amount of the intangible asset exceeds its fair value, it is subsequently assessed for impairment. In the case of NFTs, depreciation could easily occur, for example, if a famous person who has created an NFT falls out of favor with the public, causing demand for anything associated with that person to plummet. Determining fair value in such a case is extremely difficult, given that NFT markets are in their infancy and have no history. It may be necessary to consult an expert in the field relating to this specific NFT asset.
How much does NFT cost?
Prices are relatively unstable. Indeed, as the price depends on demand from the person who created the digital art piece, it can cost a lot one day, and much less the next.
Valorization of internally generated NFT
Accounting for internally-generated intangible assets with an indefinite useful life is one accounting method among others. Development costs can either be expensed or capitalized. Note that if your policy is to capitalize NFT development costs, they must meet the following criteria:
- It is technically possible to complete it and make it available for sale.
- There is an intention to use or sell it.
- It can be used or sold.
- Sufficient technical, financial and other resources are available to complete the project.
- Production costs can be reliably measured.
- There is a capacity to generate future economic benefits.
Capitalizing the costs of an internally-generated NFT may seem futile, given the abstract nature of the asset and, in some cases, the minuscule costs of creating an NFT. However, if you have a non-financial asset that could generate considerable fair market value, it’s understandable that you’d want to include this internally-generated non-financial asset on your balance sheet, even if the costs are non-material.
In the future, as NFTs become more widespread and historical sales data accumulate, the accounting and valuation of NFTs will continue to evolve. You decide whether or not to invest in an NFT. We will continue to take note of elements that may be of interest to our customers in this respect.
OpenSea or how to consult the available arts
Interested in viewing the NFT collections? To do this, simply create an account on OpenSea, for example.
Article written by Brian Legge, CPA, CA
