Crypto Accounting The Complete guide
Cryptocurrencies have gained popularity over the last few years, but their integration with IFRS financial reporting poses significant challenges. While accounting for cryptocurrencies at fair value through profit or loss seems logical, it is often incompatible with IFRS requirements.
This article delves into accounting for cryptocurrency holdings under the IFRS framework crypto accounting.
Cash and Cash Equivalents in Accounting crypto accounting
Despite their digital nature and role as a form of money, cryptocurrencies do not qualify as cash traditionally. Unlike physical currency, cryptocurrencies lack government or central bank backing and are not recognized as legal tender in most jurisdictions.
Regarding accounting, the International Accounting Standard 7 (IAS 7) for ‘Statement of Cash Flows’ does not explicitly define cash but mentions that “cash comprises cash on hand and demand deposits.”
However, IAS 32 for ‘Financial Instruments: Presentation’ crypto accounting characterizes currency (cash) as a financial asset because it serves as a medium of exchange and forms the basis for measuring and recognizing transactions in financial statements.
Cryptocurrencies do not fit the definition of cash according to IAS 7 since you can’t readily exchange them for goods or services.
IAS 7 also introduces the ‘cash equivalents’ category, encompassing instruments with cash-like characteristics nearly as liquid as cash. To qualify as cash equivalents, these instruments must be short-term, highly liquid investments with minimal risk of value fluctuations and easy conversion into known cash amounts crypto accounting.
Cryptocurrencies, however, fail to meet the criteria for classification as cash equivalents. Their susceptibility to significant price volatility, exemplified by Bitcoin’s 28% loss in value in January 2018, disqualifies them as cash equivalents under IAS 7.
Another conceivable approach to accounting for cryptocurrency crypto accounting holdings is to treat them as financial assets at Fair Value Through Profit or Loss (FVTPL). However, for this approach to be valid, a cryptocurrency must meet the criteria of being a financial instrument, as defined by the International Accounting Standard 32 (IAS 32).
IAS 32 defines a financial asset as crypto accounting:
- An equity instrument of another entity
- A contractual right to receive cash or other financial assets
- A contractual right to exchange financial assets or liabilities under favorable conditions
- A contract that may involve an entity’s equity instruments, either as:
– A non-derivative with a variable number of equity instruments crypto accounting
– A derivative with a settlement other than a fixed cash or financial asset amount for a fixed number of equity instruments.
Cryptocurrencies do not qualify as equity instruments. Owning cryptocurrency crypto accounting does not grant the holder any contractual right to receive money or another financial asset. Thus, we can conclude that cryptocurrencies do not meet the definition of a financial asset.
Investment Property Classification for Cryptocurrency Holdings
Some experts have suggested classifying cryptocurrency holdings as Fair Value Through Profit or Loss (FVTPL) based on the notion that they can be considered investment property.
However, the International Accounting Standard 40 (IAS 40) provides a specific definition for investment property, which is as follows:
“Investment property is property (land or a building, or both) held for the purpose of earning rentals or for capital appreciation.”
While it’s true that some entities hold cryptocurrencies with the expectation of capital appreciation, we believe that categorizing them as investment property and measuring them at fair value through profit or loss is not appropriate. This is because cryptocurrencies are not physical assets like land or buildings, typically associated with the concept of investment property in accounting standards.
Considering that we cannot categorize cryptocurrency holdings as cash, cash equivalents, financial instruments, or investment property, we only have three possible classification categories left: property, plant and equipment; intangible assets; or inventories.
We can immediately dismiss the property, plant, and equipment category for the same reason as an investment property, as defined by IAS 16 ‘Property, Plant and Equipment,’ which relates to “tangible items,” and cryptocurrencies lack physical form. Therefore, our focus shifts solely to the intangible assets and inventories classifications.
Accounting for cryptocurrency assets only fits with the IFRS framework. It will be appropriate to account for them under IAS 38 ‘Intangible Assets’ at cost or revaluation.
The application of the revaluation approach relies on the presence of a robust market for the specific cryptocurrency in question.
In certain situations, it might be suitable for an organization to handle cryptocurrency assets following the principles outlined in IAS 2 ‘Inventories’ for commodity broker traders. IAS 2 typically advocates recognizing inventories at a lower cost than their estimated selling price, also known as the net realizable value.
Nonetheless, the Standard specifies that commodity broker-traders must evaluate their inventories based on fair value minus the expenses associated with selling them. Any alterations in fair value minus these selling costs should be accounted for in the profit or loss statement for the relevant reporting period.
This will only be appropriate in narrow circumstances where the reporting entity acquires cryptocurrency assets to sell them soon and generate a profit from fluctuations in price or broker traders’ margins.Always remember to seek professional advice from a crypto accountant or crypto tax accountant when reconciling your on-chain transactions.