Gold Accounting

All that glitters isn’t gold. In the post-covid era, the preservation of wealth through investments in gold shall increase. As financial analysts and accountants, it is important to understand how investment in gold be accounted for under IFRS. As far as the standards stand, there are no specifications on how investments in precious metals such as gold, silver, or platinum are accounted for.

Gold as a Financial Instrument

Financial instruments arise out of contractual agreements and hence, gold cannot be accounted for as a financial instrument under IFRS 9 or IFRS 32 as there is no contractual agreement when it comes to gold.

Gold as an Investment Property

Under IAS 40, investment property is either land or building. And gold is neither land or building hence, it cannot be accounted for under IAS 40.

Gold as Inventories

IAS 2 requires commodity brokers and dealers to measure their inventories at fair value fewer costs to sell and recognize the changes in fair value in profit or loss in the period of the change. But this only applies to commodity brokers and dealers and not to others who acquire gold for investment and value storage only.

The solution for this is to make your own accounting policy confirming to IAS 8.

Under IAS 8, certain resources are to be referred to while framing own policy:

1. Finding similar IFRS relating to similar issues.
2. Look for general concepts and criteria in the conceptual framework.
3. Look for other standard setting bodies’ publications for similar issues.
4. In case the other sources contradict, prioritize IFRS relating to similar issues.

Investment in Gold:

Characteristics of investment gold:

1. Indefinite useful life;
2. fair value tends to increaseover time, mostly;
3. The main purpose is to store value, get income from its capital appreciation.

The question now is what is the issue or transaction similar to the investment gold?

The closest transaction is an investment in property as properties like land and building have an indefinite useful life, the value of land tends to increase and the main purpose for investing in land and buildings is to store value.

While financial assets like shares usually brought for capital appreciation are measured at fair value through profit or loss, similar to the fair value model in IAS 40.

Hence, the Fair Value model for investment property under IAS 40 shall be the most appropriate for accounting for Investment Gold.

Application of Fair Value Model for Gold

Step 1: Measure the acquired gold at fair value.

Note that under IAS 40, the investment property is initially measured at cost. Since we are to develop our own policy and for the fair value to be appropriate, we measure it at fair value.

Step 2: At the end of each reporting period, the gold is remeasured at fair value and accounts for changes in profit or loss.

To summarize, since there are no standards specifying how to account for investment gold, we frame our own standards in line with IAS 8. For the purposes of which we look for immediate issues that are governed by the available standards. IAS 40 is the closest, we account for the investment gold at fair value and remeasure it at the end of every reporting period.

Question: Is a gold bullion a financial instrument (similar to cash) or is it a commodity?

A gold bullion is not a financial instrument, similar to cash; it is a commodity. Although the bullion market is highly liquid, there is no contractual right to receive cash or another financial instrument inherent in a bullion. Contracts to exchange commodities might fall within the scope of the standard.