Accounting of Cryptocurrency
Gireesh Kumar Padmini
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There are many situations, where the accountants are not very clear about the accounting treatments of certain transactions. Accounting of investment in Cryptocurrency, such as Bitcoin, Ethereum etc., is one such transaction. Since there are no accounting standards under the International Financial Reporting Standards (IFRS) to address the recognition, measurement, and disclosure of such activities, it is a big challenge for accountants to record and present those activities within the framework of IFRS.
What is Cryptocurrency?
Cryptocurrency is any form of digital currency that exists virtually in which the transactions are verified and records maintained by a decentralized system using cryptography. The most significant, influential and well-known Cryptocurrency is Bitcoin, which was first launched in 2008. Using Cryptocurrency, we can transfer the value of money anywhere globally without the help of a bank or any other intermediary financial institution. The cryptocurrencies were not issued or controlled by any country’s government or other authorities. But it is secured by the technology Blockchain.
Accounting challenge
“The International Financial Reporting Standards (IFRS)” does not have specific standards or guidelines to account for the activities of Cryptocurrency. Since this is a new type of business activity globally, there is no straightforward industrial practice for recording these transactions. While considering the accounting of Cryptocurrency, accountants might consider the below International Financial Reporting Standards for its recognition, guidance and disclosures.
A. IFRS 9 “Financial Instruments”
Under the IFRS 9 “Financial Instruments”, if an entity requires to recognize a financial asset, it should be either “cash, equity instruments or a contractual right to receive cash or other financial instruments”.
We cannot consider the Cryptocurrency as cash since it does not match the typical characteristics of cash and cash equivalents (Refer Paragraph 6, IAS 7). Also, it is evident that Cryptocurrency is not an equity instrument, and the holder of Cryptocurrency does not have a contractual right to receive cash or any other financial instruments. Therefore, we cannot treat this as a financial asset (refer Paragraph 11, IAS 32), and IFRS 9 ‘Financial Instruments’ is not acceptable to record and present the Cryptocurrency.
B. IAS 40 “Investment Property”
Under IAS 40 “Investment Property”, Investment property is property (land or a building—or part of a building— or both) held (by the owner or by the lessee as a right-of-use asset) to earn rentals or for capital appreciation or both.
Some entities invest in Cryptocurrency only for capital appreciation. Since they are not tangible assets, it is not appropriate to classify them as investment properties and measure them in fair value. Using the same logic, we cannot classify Cryptocurrencies under property plant and equipment using the provisions of IAS 16.
C. IAS 2 “Inventories”
As defined by IAS 2, “inventories”; the inventories are the assets held for sale in the ordinary course of business or in the process of production for such sale or in the form of materials or supplies to be consumed in the production process or the rendering of services.
The standard does not require inventories in tangible or physical form (Refer Paragraph 6 – IAS 2). In this scenario, if the entity is holding Cryptocurrency for sale in the ordinary course of business, they can record and present it using the provisions of IAS 2 “Inventories”. Generally, inventories recognize and measure at cost or net realizable value, whichever is less. However, paragraph 3 of the standards also mentions that IAS 2 does not apply to the measurement of inventories held by commodity broker-traders who measure their stocks at fair value less costs to sell. Therefore, before using IAS 2 for the recognition and measurement of Cryptocurrency, we should adequately review the entity’s business model and determine that the inventory accounting is suitable for the asset and would be measured at cost or net realizable value, whichever is less. However, for entities that hold cryptocurrencies to sell them shortly, generating a profit from price fluctuations or traders’ margins, we might apply the commodity broker-trader exception of IAS 2.
Recognition and measurement of Cryptocurrency as Inventory
| Inventory (Normal) | Inventory (Commodity broker) | |
| Initial Measurement | Cost | Cost |
| Subsequent Measurement | cost or net realizable value, whichever is less | Fair value less costs to sell |
| Movement in carrying value | Income statement, if cost decreased | Income statement (all movements) |
D. IAS 38 “Intangible assets.”
An intangible asset is defined as an identifiable non-monetary asset without physical substance. Also, it is a resource controlled by the entity due to past events and from which future economic benefits are expected to flow to the entity. The asset is identifiable if it is either:
- Is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability, regardless of whether the entity intends to do so; or
- Arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or other rights and obligations.
The value of Cryptocurrency is not fixed or cannot be predicted since it is subject to significant variations that arise from supply and demand. That means it is a non-monitory asset in nature. Also, the Cryptocurrency can be sold or exchanged individually, and the entity can expect the inflow of economic benefits in future from such investments. Moreover, this asset does not have a physical substance.
The facts mentioned above and related interpretations of the different standards, The IAS 38 “intangible assets will be the most appropriate standard in IFRS currently available to recognize and measure the value of the investment in Cryptocurrency. However, in certain situations, as mentioned earlier, we can account for them as inventories under IAS 2.
Recognition and measurement of Cryptocurrency as Inventory
| Revaluation model | Cost model | |
| Initial Measurement | Cost | Cost |
| Subsequent measurement | Fair value less accumulated amortization and impairment | cost less accumulated amortization and impairment |
| Movement in carrying value | Other Comprehensive Income, if cost increased | Will not recognize profit, if cost increased |
| Income statement, if cost decreased | Income statement, if cost decreased |
Even though IAS 38 permits the entities to choose a revaluation model for intangible assets, the standard demands that the fair value is measured by reference to an active market. In the case of cryptocurrencies, the “active market” to refer to the fair value is not common, and the revaluation model may not be possible in such a scenario. However, If cryptocurrencies are traded, on an exchange revaluation model may be viable, but they are rare scenarios.
Amortization and Impairment
As mentioned in the above table of recognition and measurement, the subsequent measurement of Cryptocurrency as per IAS 38 is after accumulated amortization and impairment adjustment. Since cryptocurrencies are designed to act as a store of value over time, their useful life will be considered indefinite, and no amortization is required on such assets. However, even though the asset’s useful life is indefinite, the entity’s management should conduct the impairment test on those assets by comparing the recoverable amount with the carrying amount on a periodical basis. If there is an indication of impairment, the such effect should recognize as an expense through the income statement.
Conclusion
The above information on the recording and presentation of Cryptocurrency is provided based on the interpretation of standards issued under IFRS. Before applying any of the above mentioned standards, you should review the entity’s business model, cryptocurrency type, and investment nature. Then take a wise decision based on the best judgement. However, IAS 38 “Intangible assets” will be the most suitable standard for accounting of Cryptocurrency, except where they are held for sale in the ordinary course of business (IAS 2). Also, since the entity’s functional currency may differ from Cryptocurrency, it needs to be translated under the provisions of IAS 21, “The Effects of Changes in Foreign Exchange Rates”. Moreover, while presenting the investment in Cryptocurrency in financial statements, the entity should follow the disclosure requirements of ISA 38 or ISA 2, whichever is applicable.
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