“Gold and silver are money. Everything else is credit”, J.P. Morgan once said with a high leaning to gold as investment. Today of course, not everybody may agree to this, especially with the advent of various sources of streams of income such as derivatives and cryptocurrencies, and since for us accountants, investment in gold does not always guarantee future cash flows such as interest and dividend. But since we are inclined to be attracted to anything that glitters, the popularity of gold especially to Filipinos remain high.
History, however, speaks volumes as to how gold performed over time. From P1,800.00 for a 24-karat gold per gram in 2018, it is now at P3,300.00. No wonder that over the years, I have noticed the influx in the financial statements of corporations, listed or not in the stock exchange, on their investment portfolio in gold. Commodity brokers and dealers call this investment in gold which may be in the form of ingots, bars, wires and the like which form part of their report as inventories.
With a positive outlook on the rising price of gold in the market, I became personally interested in placing some investment for this precious metal. But over time though, my financial capability was saying otherwise, so I tried to shift my attention to something that has always been a concern about: the accounting treatment for investment in gold. I tried searching my reference materials including related articles and came across with a video by Silvia of CPDbox entitled “How to account for investments in gold under IFRS” and from this, let me share her discussion and hopefully shed some light on this topic.
The Philippine Financial Reporting Standards (PFRSs) over the years has adopted several accounting treatment for peculiar industries and items, such as PAS 41 for biological assets that is concerned with agricultural activities, PFRS 6 for mining assets and PFRS 17 for insurance contracts, to name a few. However, no particular PFRSs was issued for the accounting treatment for investment in gold. Nonetheless, PAS 32/ PFRS 9 – Financial Instruments and PAS 40 – Investment Property are the closest standards appropriate that can cater to such issue.
Firstly, PAS 32/ PFRS 9, which deals with financial instruments and defines financial instruments as any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another. A financial instrument arises from a contractual arrangement, where such element is absent when it comes to gold. Therefore, we can say that investment in gold is not a financial asset and it is not within the scope of PAS 32 or PFRS 9.
Another standard in consideration is PAS 40 due to fact that the intention for holding gold is for capital appreciation. However, the definition for investment property is only limited to land, building or their parts.
With both standards not expressly including investment in gold in their scopes, it appears that there is no specific PFRS dealing with investment in gold. In cases like this, we can refer this matter to the provisions of PAS 8 – Accounting Policies, Changes in Accounting Estimates and Errors, which requires financial preparers to refer the matter to accounting standards dealing with similar and related issues or the Conceptual Framework.
In other words, preparers of financial reports may develop its own accounting policy with reference to existing standards that deal with similar issues. With the characteristics of investment in gold of having an indefinite useful life, its fair value tends to increase over time, and the purpose of holding it for capital appreciation, we can simply relate this to an investment property specifically to land. In developing our own accounting policy for investment in gold, we can refer to PAS 40, but not strictly follow the rules of PAS 40 such that initially, the investment in gold may be recognized at fair value instead of cost, which is more appropriate since gold is readily convertible to cash anytime, and subsequently, at fair value and account for any changes at profit or loss.
With the popularity of gold as investment during uncertain times such as the COVID 19 pandemic, it is expected that the International Accounting Standards Board (IASB) may soon release another peculiar standard that deals with precious metals such as gold, similar to recent issuances such as Web Site Costs (SIC 32), which was issued when the internet became widely available.
Floyd C. Paguio, CPA, MBA is the Chairman and Chief Executive Officer (CEO) of Paguio, Dumayas & Associates, CPAs (PDAC), the Philippine Member Firm of PrimeGlobal International. He is also the Chairman and Managing Director of Philippine Review Institute for Accountancy (PRIA), a CPA review school in the southern part of Metro Manila. He is a member of PICPA and currently a member of the committees on Quality Assurance Review (QAR) and Media Affairs. The views and opinions of the author do not reflect in any way those of these organizations.