Cryptocurrencies have been amongst us for over a decade. But what used to be mainly a subject of interest for private investors and enthusiasts, has now achieved a grudging respectability and is attracting the interest of large corporates. Therefore, it is important that corporate treasurers understand this new class of assets, including the accounting for it.
Accounting standards are based on the paradigm that existed at the time they were written. New accounting standards are often issued―or existing ones are amended or interpreted― to keep pace with new trends and innovations in the marketplace. At the time of writing this article, cryptocurrencies are not specifically referred to in any IFRS accounting standard. This is not likely to change in the near future as the IASB has not added this topic to its workplan. Nevertheless, the IFRS Interpretations Committee (IFRIC) published an Agenda Decision in June 2019 about how to account for holdings of cryptocurrencies under IFRS1 This article summarises the Agenda Decision and discusses some other accounting aspects related to cryptocurrencies.
Despite being called cryptocurrencies, they do not meet the definition of cash. Cash is defined by IAS 32 Financial Instruments: Presentation as a medium of exchange. While some cryptocurrencies can be sometimes used to pay for goods or services, this is not enough to conclude that they are a medium of exchange as they do not represent legal tender2. The value of cryptocurrencies is usually very volatile, so they also fail to be cash equivalents under IAS 7 Statement of Cash Flows, which requires them to be subject to “an insignificant risk of changes in value”.
That cryptocurrencies are in many cases simply held as a speculative investment would suggest that accounting for them at fair value through profit or loss (FVPL) under IFRS 9 Financial Instruments would seem the most logical option. It would show the gains and losses arising from holding them, and allow investors to make appropriate decisions. However, cryptocurrencies are not financial assets either. This is because:
The IFRIC concluded that what they might be is inventory or intangible assets.
Some businesses use cryptocurrencies for trading purposes in the ordinary course of their business. Under IAS 2 Inventories, inventory is measured at the lower of cost and net realisable value. Cost is the fair value of consideration paid to acquire them and costs to get them to their current location and condition. A fall in the value of cryptocurrencies is a reduction in net realisable value and should be recognised in profit or loss. Any appreciation above cost is simply ignored until they are sold.
Only if an entity acts as a broker-dealer and actively trades cryptocurrency - i.e. buys and sells cryptocurrency with the purpose of making profits in the near term -, then a cryptocurrency inventory is measured at net realisable value, with changes in value recognised in profit or loss for both appreciation and depreciation above and under cost, respectively.
Otherwise they are intangible assets under IAS 38 Intangible Assets, because:
If accounted for under IAS 38, cryptocurrencies shall be measured under the cost model or revaluation model as an accounting policy choice.
If cost is chosen, they are carried at their cost less any accumulated amortisation and impairment losses. However, cryptocurrencies have an indefinite useful life―so, they should not be amortised, but rather tested annually for impairment.
If the revaluation model is used, they are carried at the revalued amount―the fair value on the measurement date.
Revaluation gains and losses are recognised as follows:
Revaluation gains are recognised in other comprehensive income (OCI) in a revaluation reserve and only recognised in profit or loss to the extent that they reverse a downwards revaluation of the same asset previously recognised in profit or loss.
Revaluation losses are recognised in profit or loss, but only once any credit balance in the revaluation reserve in respect of that asset is used up.
The nature of cryptocurrencies, the reasons for holding them, and the observability of quoted prices in active markets, suggest that the revaluation model provides more relevant information to users. However, the movements in the revaluation reserve could be seen by some to obscure useful facts.
Initial coin offerings (ICO) are a form of attracting funds and are becoming increasingly popular amongst treasurers. ICOs raise cash by issuing a ‘white paper’ that provides details about the proposed venture. But instead of issuing shares to the subscribers, the entity issues digital tokens (e.g. cryptocurrencies). The debate about accounting for crypto assets has so far centred on holdings of assets―the debit. But the accounting by the issuer―i.e. on the credit side of the balance sheet―is as relevant. This will depend on a careful analysis of the nature of the tokens and the rights attached to them. Simplistically, accounting for ICO tokens needs to consider whether the following guidance can be applied:
In the absence of a specific standard, the accounting for cryptocurrencies will always involve significant judgement about what is the most useful information to present. Disclosures under IAS 1 Presentation of Financial Statements should allow the users of financial statements understand how cryptocurrencies are being accounted for and what their financial impacts are, if material.
Even if not strictly applicable, existing standards can be used by analogy to assist in preparing cryptocurrency-related disclosures. An example is IFRS 7 Financial Instruments: Disclosures which―although not applicable because cryptocurrencies are not financial instruments―can provide good guidance on how to disclose the extent of the entity’s exposure to cryptocurrency investments and the risks associated with it, and how these are managed (potentially showing sensitivities based on reasonable changes in market prices).
IAS 10 Events after the Reporting Period is also relevant because a material change after the reporting date in the value of cryptocurrencies held by the entity is a non-adjusting event that must be disclosed.
The IASB is aware of cryptocurrencies but will not include them on their workplan while holdings by companies remain relatively insignificant. Meanwhile, cryptocurrencies are neither cash or cash equivalents nor financial assets, and fall to be accounted for as intangible assets under IAS 38―unless the entity sells them in the normal course of business, in which case they are inventory and fall under IAS 2. As a result of these constraints, some entities resort to non-GAAP measures in management commentary to describe their dealings in these assets.
Issuers of digital tokens have to analyse the nature and rights attached to them to determine which existing accounting guidance applies, or develop one in case none exists.
The absence of specific accounting standards for cryptocurrencies require significant judgements when accounting for them. This type of assets also involve considerable risks. Therefore, an entity must take into consideration existing disclosure requirements or design applicable ones to assist the users of the financial statements to make good decisions.
2 NB: central bank digital currencies (CBDC) ―which are a digital form of central bank money―are not by definition cryptocurrencies and, therefore, are not considered in this article.