Cryptocurrencies are considered the future of the banking and financial system as there have been a lot of technological developments around cryptocurrencies during the last decade. However, there are still many challenges surrounding cryptocurrencies like regulatory, security, price volatility, and lack of proper accounting standards and practices.
Unfortunately, currently, there is not a single accounting standard under IFRS that deals with and explains the accounting treatment of cryptocurrencies. A cryptocurrency is a digital or virtual currency that is secured by cryptography, which makes it nearly impossible to counterfeit or double-spend. Cryptocurrencies are recorded with a blockchain also known as a distributed ledger infrastructure which provides rights of use or ownership interest like a normal currency. The crypto tokens are owned by entities that own the key that allow them to create new entries in the ledger. These tokens are represented by specific amounts of digital resources which provide the entity right to control or reassign them to other parties.
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There are many interesting facts about the accounting treatment of cryptocurrencies under IFRS including:
1. Cryptocurrencies cannot be considered equivalent to cash as they don’t meet the criteria of IAS 7-Statement of cash flow and the IAS 32-Financial instruments presentation. Although there are hundreds of thousands of daily transactions in cryptocurrencies they cannot be readily exchanged with goods and services. Also, cryptocurrencies do not represent a legal title in most jurisdictions around the globe. Another reason is that cryptos are subject to huge price volatility.
2. Another interesting fact is that cryptocurrencies do not seem to meet the definition of financial instruments for the following reasons.
3. Cryptos do not represent cash.
4. Cryptos are not equity interests like shares in an entity.
5. Cryptos are not contracts establishing a right to receive or deliver cash and another financial instrument so they are not debt security like debentures etc.
The mainstream accounting standards dealing with financial instruments do not seem to deal with cryptocurrencies. However, it is interesting to note that some of the businesses treat cryptocurrencies under IAS 2 – Inventories depending upon their business model. Businesses that are engaged in holding and selling cryptocurrency generate a profit from fluctuations in price. This also means that inventory of cryptocurrency will be treated at a lower cost or net reliable market value. On the other hand, if an entity act as a broker-trader of cryptocurrencies, then crypto their inventories should be valued at fair value with fewer costs to selling.
Also, there is another accounting standard IAS 38 – Intangible Assets and it appears that cryptos meet the definition of intangible assets due to the following reasons:
1. An identifiable asset that arises from a legal or contractual agreement.
2. They are non-monetary assets which we have already discussed above under IAS 7 and IAS 32.
3. They are without physical substance.
4. They are separable as they are 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.
We will not discuss here IAS 38 in many details but cryptocurrencies seem to be treatable under IAS 38. If a business will treat them under IAS 38 then all of the provisions of IAS 38 will apply to cryptocurrencies.
For example, IAS 38 allows intangible assets to be measured at cost or revaluation. Using the cost model, intangible assets are measured at cost on initial recognition and are subsequently measured at cost less accumulated amortization and impairment losses.
Accounting for cryptocurrency involves a lot of judgment and uncertainty in its recognition, measurement, presentation, and disclosures. However, accountants have to disclose the basis of their judgment and reason for a particular treatment. This is not simple stuff until cryptocurrencies will get a legal status globally and accountancy bodies along with regulators will work together to design well-structured financial reporting standards. This will help to reduce the risks surrounding cryptocurrencies and will also build confidence.
