Accounting for Cryptocurrency by Funds: U.S. GAAP vs. IFRS
Cryptocurrency may be a relatively “new” investment for investment funds, but it highlights an old issue as it relates to why U.S. GAAP is a preferable basis of accounting for investment companies as opposed to IFRS. Investment companies (e.g. hedge funds) more commonly hold investments in cryptocurrency than other types of entities and therefore, these types of entities are the first to be exposed to the necessary analysis on how to account for these investments. This post discusses the accounting for cryptocurrency by funds under both U.S. GAAP and IFRS.
Preferred treatment of accounting for cryptocurrency by funds
In our Investment Management Industry Fundamentals online course collection and live-classroom training course, we highlight the unique transactions of this industry, and the special accounting and reporting followed by investment companies. It is generally considered that funds would prefer to account for its investments at fair value through P&L as this provides investors and users of the financial statements with the most relevant information. However, when comparing U.S. GAAP to IFRS in this course, we often see that this may not always be the result. Cryptocurrency accounting highlights one of these fundamental differences between U.S. GAAP and IFRS for investment funds.
Accounting for cryptocurrency by funds under IFRS
IFRS does not provide industry-specific accounting for investment entities and therefore, proper analysis of all IFRSs is necessary to determine the proper accounting for cryptocurrency.
My colleague, Christine Leese, posted a blog last week focusing on a recent IFRIC agenda decision related to cryptocurrency published in their June 2019 meeting. The IFRIC determined that under IFRS, a cryptocurrency does not meet the definition of a financial asset, namely that cryptocurrency was NOT cash. In order to be cash, crypto-assets should be used as a “medium of exchange (i.e. used in exchange for goods or services) and as the monetary unit in pricing goods or services, to such an extent that it would be the basis on which all transactions are measured and recognized in financial statements.” They concluded that CURRENTLY, cryptocurrency does not meet this definition (leaving the door open to be considered cash in the future when it becomes more commonly used in business).
Therefore, cryptocurrency is viewed as an intangible asset under IAS 38 Intangible Assets, unless it is held to be sold in its ordinary course of business, in which case IAS 2 Inventories would apply.
Intangible assets under IAS 38
Intangible assets under IAS 38 are generally measured at cost. Depending on whether the intangible asset has a finite or indefinite life, the cost is subject to amortization and impairment or just an annual impairment test. There is, however, a revaluation approach if an active market exists for the asset. However, increases in value due to revaluations are recognized through OCI (not earnings), whereas decreases below cost due to revaluations are recognized in earnings.
Want to learn more about accounting for intangible assets under IAS 38? Check out this online course.
Inventory under IAS 2
Inventory is generally measured at the lower of cost or net realizable value under IAS 2. However, there is a measurement exception for broker-dealers of commodities. This exception states fair value (less cost to sell) may be used for measurement. However, IAS 2.5 clearly limits this exception to inventory that is “principally acquired with the purpose of selling in the near future and generating a profit from fluctuations in price or broker-traders’ margin.” This likely will be a tough hurdle to reach for an investment fund.
Want to learn more about accounting for inventory under IAS 2? Check out this online course.
Can cryptocurrency investments be held at fair value through the P&L under IFRS?
Doubtful. As result of the IFRIC guidance, the ability to hold a medium to long-term investment in cryptocurrency at fair value through the P&L is unlikely under IFRS.
Accounting for cryptocurrency by funds under U.S. GAAP
Like IFRS, U.S. GAAP would most likely consider investments in cryptocurrency to be intangible assets. However, unlike IFRS, U.S. GAAP has a standard that is directly “on point.” ASC 350-60 governs the accounting for in-scope crypto assets. Such assets to be reported on the balance sheet at fair value, with changes in fair value reported in earnings. This guidance was outlined in ASU 2023-08 and is effective for fiscal years beginning after December 15, 2024.
However, investments companies didn’t need ASU 2023-08 to permit them to account for investment in cryptocurrency at fair value. U.S. GAAP provides industry-specific guidance for many industries including investment companies. Therefore, an investment company (as defined by ASC 946) does not have to perform nearly as complex an analysis as under IFRS.
Under ASC 946, investments (whether financial or non-financial, tangible or intangible) are measured at fair value through P&L. This measurement approach enables the financial statements to determine a current net asset value (and NAV per share) for an investment fund at each reporting date, which is the most relevant information for an investor or user of the financial statements.
Closing thoughts
Recently, I facilitated a U.S. GAAP Update for Investment Companies for a client. During the training, I asked one of the firm’s leaders in crypto assets how he was advising his clients to address the recent IFRIC guidance regarding accounting for cryptocurrency. His response… “I tell them to move to U.S. GAAP!”
If you’d like to learn more about the special accounting for investment companies under U.S. GAAP, check out our Investment Management Industry Fundamentals online course collection!
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Disclaimer
This post is for informational purposes only and should not be relied upon as official accounting guidance. While we’ve ensured accuracy as of the publishing date, standards evolve. Please consult a professional for specific advice.
