Monthly Archives: April 2023

Introduction

 

ESG investing has become increasingly popular in recent years as investors seek to align their investments with their values. Environmental, social, and governance factors are now used to evaluate companies to invest in.

According to the Global Sustainable Investment Alliance, ESG investing assets under management reached $35.3 trillion globally in 2020, a 15% increase from 2018. According to a report by Bloomberg, ESG assets may hit $53 trillion by 2025.

ESG Investing – Challenges and Opportunities

Companies that prioritize ESG factors are becoming more attractive to investors. Industries such as renewable energy, sustainable agriculture, and green technology have strong environmental practices and are favored by ESG investors. On the other hand, industries such as fossil fuels, tobacco, and weapons manufacturing are often avoided by ESG investors due to their negative social and environmental impacts.

Investors can use various ESG metrics to assess a company’s performance in each of these areas. Environmental metrics evaluate a company’s impact on the environment, such as carbon emissions, water usage, and waste generation. Social metrics look at a company’s impact on its stakeholders, including diversity and inclusion policies, labor practices, and human rights. Governance metrics evaluate a company’s leadership and management, such as executive compensation, board diversity, and shareholder rights.

However, one of the biggest challenges of ESG investing is the lack of standardization in ESG metrics. There is no universal standard for what constitutes an environmentally or socially responsible company. This makes it difficult for investors to compare companies. Additionally, some investors argue that prioritizing ESG factors can lead to lower returns, while others believe that investing in companies with strong ESG practices can lead to better long-term returns.

Despite these challenges, ESG investing is likely to continue to grow in popularity. As the world becomes more focused on sustainability and social responsibility, the demand for ESG investments is expected to increase. Standardization and transparency in ESG metrics could help to alleviate some of the challenges associated with ESG investing.

Concluding remarks

In conclusion, ESG investing is a type of investment strategy that considers environmental, social, and governance factors when evaluating companies to invest in. ESG investing allows investors to support companies with positive impacts and avoid companies with negative impacts. The trend towards ESG investing is growing rapidly as the world prioritizes sustainability and social responsibility.

Project Accountants take pride in providing support to businesses and funds with an ESG initiative. Please reach out to a member of our team or visit www.projectaccountants.co.uk to learn more about how we can help you.

Overview:

Accounting for NFTs (Non-Fungible Tokens) under IFRS can be challenging considering the nature of assets and process involved in creation and underlying commercial activity.

NFT is a unique digital asset that is verified using blockchain technology, making it a one-of-a-kind item that cannot be replicated or exchanged for something else. During the creation process, digital assets are tokenized via blockchain technology and are assigned with unique identification codes and metadata that makes them unique.

NFTs are typically created on Ethereum, the most popular blockchain platform for creating NFTs. During the minting process, a smart contract is created. A smart contract is a self-executing contract that automatically enforces the terms of the agreement between the buyer and seller of NFT.

Some of the key features of NFT include transparency, digital ownership, and traceability.

Use cases of NFT transcend digital art, collectibles, gaming, music, real estate, etc.

Accounting of NFTS:

As with any other asset, the accounting treatment of NFTs would depend on their economic substance. Accounting for NFTs can be challenging, given their unique characteristics and the regulatory landscape.

Here are some general guidelines for accounting for NFTS as per the International Financial Reporting Standards (IFRS).

Initial Measurement

Depending on the economic substance, an asset may be accounted for under IAS 38 Intangibles Assets or IAS 2 Inventory.

NFTs acquired for the purpose of trading are likely to be classified as inventory under IAS 2. They are initially measured at cost and subsequently at lower of cost or net realisable value. On the sale of asset, any purchase/creation costs would be expensed.

An asset that meets the criteria under IAS 38 should be initially measured at cost. Subsequently, the asset is measured either on cost model or revaluation model as per the entity’s policy.

IFRS 15 revenue considerations

Where an entity earns income arising in the course of its ordinary activities involving NFTs, IFRS 15 considerations apply. In this case he five-step model would need to be followed. A summary of the model is presented below for reference.

Step 1: Identify the contract:

The first step is to identify whether a contract exists with the customer, and if so, what the terms of that contract are.

Step 2: Identify the performance obligation:

The second step is to identify the performance obligation for example sale of NFT.

Step 3: Determine the transaction price:

Transaction price can be in the form of cash or non-cash consideration. The transaction price can be variable for example in the form of royalty paid to the seller when the purchaser resells the NFT.

Step 4: Allocate the transaction price:

In general, the entire transaction price for NFTs would be allocated to the performance obligation in relation to transferring ownership of the NFT.

Step 5: Recognise the revenue:

Revenue would be recognised in accordance with the transferability of risk and rewards associated with NFT.

Disclosures

While there are no specific disclosure requirements in place related to NFT’s, the requirements under the relevant accounting standards apply.

Concluding remarks

The NFT market is getting traction by the day. However, it’s important to note that the NFT market is subject to volatility and fluctuations. That being said, the potential use cases for NFTs are broad, and the technology has the potential to disrupt various industries. With new players entering the market, increased integration with mainstream platforms, and the emergence of niche marketplaces, the NFT market is poised for continued growth and innovation. NFT might become one of the game-changing innovations capable of bringing sustainable and robust economic development.

Project Accountants take pride in providing accounting support to businesses having exposure in the NFT space. Please reach out to a member of our team or visit www.projectaccountants.co.uk to find more about how we can help.