Crypto Accounting – it’s not that tough
We all agree that crypto assets are assets as defined in the Conceptual Framework of Accounting, but what kind of asset?
Although numerous stakeholders asked for guidance from the IASB on the classification of crypto assets, the IASB indicated that the current standards contain sufficient guidance for the accounting of crypto assets, and it would not pursue a separate project for it. There is no specific standard that provides guidance on crypto assets, we therefore look to the general principles contained in the current standards to determine the classification. To do this, one must assess the purpose of holding the crypto asset and how it derives its inherent value. The current accounting standards provide for three different types of classifications and their related measurement requirements.
Is it cash? No, crypto assets do not meet the definition of cash as it is not defined in regulation as legal tender, nor cash equivalents as it is subject to a significant risk of change in value. Read more on this in our article “Metamorphosis of Cash to Crypto”. Typically, cryptocurrencies do not give the holder a contractual right to cash, therefore it is not a financial asset. Careful consideration should be made with regard to whether some crypto tokens that do provide the holder with a contractual right to receive cash or another financial asset, however, it should first be considered whether the rights are legally enforceable. In this case IFRS 9 accounting could apply.
Is it an intangible asset? Crypto assets meet all the elements of the definition of an intangible asset. It is identifiable as it can be sold or exchanged, be careful of start-up crypto assets, since they sometimes do not meet this requirement. It is non-monetary, since it is not money as defined in IAS 21 The Effects of Changes in Exchange Rates, neither is it an asset to be received in fixed or determinable amounts of money, nor does it have a physical form. Intangible assets can be measured using the cost model or the revaluation model, consider the following implications:
Revaluation model | Cost model |
Carried at fair value less accumulated amortisation and any accumulated impairment | Carried at cost less accumulated amortisation and any accumulated impairment |
An active market for the intangible must exist, which is plausible for popular cryptocurrencies such as Bitcoin and Ethereum | Default model for intangible assets |
Shall be remeasured with sufficient regularity that the carrying amount does not differ materially from its fair value | Not revalued, step upwards fluctuations in value are not considered |
Differences are recognised through other comprehensive income and accumulated in equity under a revaluation reserve. Impairment will reduce the reserve until zero, after which it will be taken to profit or loss. Depending on the accounting policy choice, amortisation is recognised in profit or loss or other comprehensive income. | Impairment is always recognised in profit or loss along with amortization. |
Consideration should be made to whether there would be amortisation of cryptocurrencies. In most cases we do not expect there to be since there is no foreseeable limit to the period over which the asset is expected to generate future economic benefits, resulting in an indefinite useful live intangible asset.
If it is classified as an intangible asset, and there is an expectation that the cryptocurrencies will be sold, the held for sale criteria in IFRS 5 Non-current Assets Held for Sale and Discontinued Operations must be considered.
Is it inventory? Yes, if the crypto asset is traded, in the ordinary course of business. If the crypto assets are held for extended periods of time, it is most likely not inventory. The highest value inventory can be accounted for is cost, its lowest value is the net realisable value (NRV), should it be lower than cost. Even if the NRV increases above the cost, the asset value will not exceed its cost. How cost is determined would depend on the accounting policy of each entity and could differ between companies. IAS 2 Inventories allows the preparer of the financial statements to elect the different cost models such as: first-in, first-out basis or the weighted average cost basis. Only once crypto assets can be considered as a commodity can it be measured at fair value less cost to sell, where the differences are recognised in profit or loss.
Crypto assets are therefore either intangible assets or inventory depending on whether they are to be sold in the ordinary course of business. The impact of this classification has vast consequences for the measurement of the crypto asset.
If you are keen to learn more about how Bitcoins work, read the following article: How does a Bitcoin transaction work?
06 December 2022
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