What comes to mind when you hear the word “cryptocurrency”?
Bitcoin and Ethereum may come up as these are popular cryptocurrencies that are often discussed in the news, however there are a plethora of cryptocurrencies that exist today. And even though cryptocurrency has been around for a few years now, it still seems not to be well-defined. To some, cryptocurrency is an investment, to others it's property, and some may even say it is a commodity. This has contributed to the issue of how holdings in cryptocurrency should be accounted for.
This was an issue brought to the IFRS Interpretations Committee (IFRIC) and some may be surprised at the conclusion they arrived at. Let’s take a look at their analysis and conclusion.
Application of IFRS Standards to Holdings of Cryptocurrencies
As we noted above, the definition of cryptocurrency is murky and there is a wide range of crypto-assets that exist. Because of this, the IFRIC Committee first defined characteristics of an asset that, if met, would be deemed “cryptocurrency” and fall under the decisions that we will discuss here. These characteristics are as follows:
- A digital or virtual currency recorded on a distributed ledger that uses cryptography for security
- Not issued by a jurisdictional authority or other party
- Does not give rise to a contract between the holder and another party
Is cryptocurrency a financial asset?
Financial assets are accounted for under IFRS 9 Financial Instruments (which by the way if you are interested, you can check out our webinar series on IFRS 9 here) and it seems intuitive that digital currency would be accounted for as such. However, in taking a closer look at the definition of a financial asset, cryptocurrency does not meet the requirements.
IAS 32 Financial Instruments: Presentation defines a financial asset. To summarize the guidance, a financial asset is one that is:
- An equity instrument of another entity
- A contractual right to receive cash or another financial asset from another entity
- A contractual right to exchange financial assets or financial liabilities with another entity under particular conditions, or
- A particular contract that will or may be settled in the entity’s own equity instruments
In applying this definition to cryptocurrency, the IFRIC Committee concluded that a holding of cryptocurrency is not a financial asset as none of the points above are met. The last four points above are self-evident, but isn’t cryptocurrency a form of digital currency and considered cash?
The IFRIC Committee again looked to IAS 32 for the description of cash, which they observed “implies that cash is expected to 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 recognised in financial statements.” Based on this description, the Committee concluded that cryptocurrencies are not cash.
So, if cryptocurrency is not a financial asset, what is it from an accounting perspective and what guidance should be applied?
What are cryptocurrencies from an accounting perspective?
Cryptocurrencies are intangible assets. IAS 38 Intangible Assets defines an intangible asset as ‘an identifiable non-monetary asset without physical substance.’ Two critical characteristics of that definition are “identifiable” and “non-monetary."
IAS 38 states that an asset is identifiable if it is separable or arises from contractual or other legal rights.
Guidance on what is non-monetary can be found in IAS 21 The Effects of Changes in Foreign Exchange Rates. IAS 21 states that “the essential feature of a non-monetary item is the absence of a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency."
Since cryptocurrency is capable of being separated from the holder and sold or transferred individually, and it does not give the holder a right to receive a fixed or determinable number of units of currency, it meets the definition of an intangible asset.
Which accounting standards apply?
Accounting for intangible assets falls under IAS 38. However, IAS 38 only applies if the instrument is not a financial asset and no other IFRS standard is applicable.
We already established above that cryptocurrency is not a financial asset so that leaves whether another IFRS standard applies. The IFRIC Committee noted that an entity may hold cryptocurrency for sale in the ordinary course of business. Under these circumstances, the holding of cryptocurrency is inventory and should be accounted for as such under IAS 2 Inventories.
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