Digital Assets and Climate Change Pose New Challenges for Accountants

Mary Barth explains why investors need better information on new and hard-to-quantify risks.

October 27, 2022

| by Katia Savchuk
Two men standing on either side of a wide open gap on white platforms in front of a blue sky, looking down in puzzlement. iStock/Martin Barraud

Many intangible assets are missing from companies’ financial statements. | iStock/Martin Barraud

Corporate accountants traditionally have focused on reporting financial information such as revenue, liabilities, and inventory. With the emergence of complex new issues like digital assets and climate change, Mary E. Barth thinks the time might be right to consider new ways of providing investors with the information they need.

“There are known to be things missing from financial statements, but we never get around to fixing the problem,” says Barth, a professor emerita of accounting at Stanford Graduate School of Business. “Accounting aims to provide information to help investors make decisions, so if major things are missing or not accounted for in the best way, that’s a deficiency.”

For years, as Barth explains in a recent paper, a number of thorny accounting issues have languished in what is known as the “‘too difficult’ box.” One example is intangible assets such as licenses, intellectual property, goodwill, and brands. “Given today’s economy, a lot of a company’s value comes from intangible assets, and most of these are absent from financial statements,” Barth says. “That leaves a big disconnect between financial statements and what the company is really worth.”

The result is that investors are left to fill in these blanks with whatever information they can scrounge. Since their knowledge is incomplete, they may invest less or charge more for their funding than they would otherwise. “The market is less efficient than it could be, and the whole economy suffers,” Barth says. “The pie is smaller because we’re paying for uncertainty.”

One reason for this state of affairs is historical. Accounting began as a way to track transactions, Barth explains: “I give you some money, you promise to pay me back, you go off on a ship and come back with products.” But in today’s world, just sticking to dollars and cents leaves out critical information. “Many of the things investors want to know about and that would help them make their investment decisions are hard to estimate the value of, or even the cost of,” Barth says. Who knows exactly how much a patent is worth or how much funding it took to obtain it? “Given how hard it is, effectively accountants have taken the route of ignoring them.”

Counting Crypto and Carbon

Barth points out two critical challenges that risk being relegated to the “too difficult’ box”: accounting for digital assets and assessing the effects of climate change.

Crypto assets such as Bitcoin are often treated as intangible assets because they don’t meet the accounting definition of currency, inventory, or financial instruments. The crypto asset exchange Coinbase is among those clamoring to account for these assets based on their fair value — what they’d currently fetch in the market — but their volatility means that the market price on a particular day does not tell the entire story. Treating crypto as intangible assets means that “there’s virtually no information in financial statements now about the risk associated with these assets,” Barth says.

Climate change can pose a significant threat to a company’s operations, and a firm, in turn, affects the environment through its carbon emissions or mitigation efforts. Yet little, if any, of that information is disclosed in financial statements. That’s, in part, because “we don’t really have financial information on climate change yet,” Barth says.

“A lot of a company’s value comes from intangible assets, and most of these are absent from financial statements. That leaves a big disconnect between financial statements and what the company is really worth.”

One option, she suggests, is for financial statements to include quantitative data that isn’t financial. Consistent nonfinancial metrics would allow investors to compare one company to another more easily. For example, companies could disclose how many patents they generated in a quarter, the number of Bitcoins they own, or their carbon emissions. Eventually, this could expand to other currently unquantified assets such as human capital, customer satisfaction, and data. Barth also thinks there’s room for qualitative information that gives investors a more transparent window on risk, such as disclosures about the volatility of a particular crypto asset.

Setting New Standards

Barth is hopeful that the organizations that enact accounting standards will address these challenges. “I think there’s enough demand for this information that they’ll do something,” she says. It seems they agree.

In March, the Securities and Exchange Commission proposed a new rule requiring public companies to disclose climate-related information such as carbon emissions and the risks they face from extreme weather. In August, the Financial Accounting Standards Board, which sets accounting standards in the United States, announced a project to address how digital assets are treated in financial statements. As part of that project, the FASB recently decided to propose fair value accounting for crypto assets. (Barth is a trustee of the Financial Accounting Foundation, which oversees the FASB, but notes that she does not speak on behalf of the organization.)

The profession has proven in the past that it can evolve. When derivatives gained popularity in the 1970s, existing accounting models called for them to be measured at cost, which often was zero. Eventually, the standards changed to require measuring these complex financial instruments at fair value. Financial statements have also expanded to include some non-financial information, such as assumptions about future salaries that go into calculating employee pension liabilities.

“Standards have to be developed, and companies have to put systems in place to come up with information and internal controls to make sure the information is reliable,” Barth says. “Every change is costly. It’s a long process.”

It may take time to implement, but Barth points out that more accurate information will ultimately benefit investors and corporations. “Better accounting supports a more prosperous society,” she says. “With better information, investors make better decisions regarding where to invest their capital. With better decisions, there is less waste, capital gets into the right hands, and everyone benefits.”


Barth’s views are her own and do not necessarily represent the views of the Financial Accounting Foundation or its standard-setting boards, the Financial Accounting Standards Board and the Governmental Accounting Standards Board, or their staff. As an FAF trustee, Barth does not participate in setting standards or agendas or speak on behalf of the FASB or GASB.

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