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Accounting for cryptocurrencies - Coggle Diagram
Accounting for cryptocurrencies
When no accounting standard cover an issue, accountants need to refer to the existing accounting standard
(and perhaps even the Conceptual Framework of Financial Reporting)
For SBR candidates, it is reasonable to suggest an accounting standard and then explain why that standard is not applicable
What is cryptocurrency?
an intangible digital token that is recorded using a distributed ledger infrastructure, often referred to as a blockchain
These tokens provide various rights of use
For example
cryptocurrency is designed as a medium of exchange
it provides rights to the use other assets or services
it can represent ownership interests
These tokens are owned by an entity that owns the key that lets it create a new entry in the ledger
Access to the ledger allows the re-assignment of the ownership of the token
These tokens are not stored on an entity’s IT system as the entity only stores the keys to the Blockchain (as opposed to the token itself)
Blockchain
They represent specific amounts of digital resources which the entity has the right to control, and whose control can be reassigned to third parties.
What accounting standards might be used to account for cryptocurrency
Cash
because it is a form of digital money
arguments
cryptocurrencies cannot be considered equivalent to cash (currency) as defined in IAS 7 and IAS 32
IAS 7 defines cash equivalents as ‘short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value’
However, cryptocurrencies are subject to significant price volatility therefore cannot be classified as cash equivalents
because they cannot readily be exchanged for any good or service
Although an increasing number of entities are accepting digital currencies as payment, digital currencies are not yet widely accepted as a medium of exchange and do not represent legal tender
Entities may choose to accept digital currencies as a form of payment, but there is no requirement to do so.
financial asset at FVTPL (IFRS 9)
arguments
it does not seem to meet the definition of a financial instrument either because it does not represent cash, an equity interest in an entity, or a contract establishing a right or obligation to deliver or receive cash or another financial instrument
Cryptocurrency is not a debt security, nor an equity security (although a digital asset could be in the form of an equity security) because it does not represent an ownership interest in an entity
IAS 38, Intangible Assets
digital currencies do appear to meet the definition of an intangible asset
def of intangible asset
an identifiable non-monetary asset without physical substance
an asset is identifiable if
if it separable, or
if it can be 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
Cryptocurrency holdings can be traded on an exchange
there is an expectation that the entity will receive an inflow of economic benefits
it arises as a result of contractual or legal rights
non-monetary
corresponds with IAS 21, The Effects of Changes in Foreign Exchange Rates
which states that an essential feature of a non-monetary asset is the absence of a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency
cryptocurrency is subject to major variations in value and therefore it is non-monetary in nature
Cryptocurrencies are a form of digital money and do not have physical substance
IAS 2, Inventories
In certain circumstances, and depending on an entity’s business model, it might be appropriate
because IAS 2 applies to inventories of intangible assets
because IAS 2 applies to inventories of intangible assets
held for sale in the ordinary course of business
For example, an entity may hold cryptocurrencies for sale in the ordinary course of business
in the process of production for such sale, or
in the form of materials or supplies to be consumed in the production process or in the rendering of services
Normally, this would mean the recognition of inventories at the lower of cost and net realisable value
However, if the entity acts as a broker-trader of cryptocurrencies, then IAS 2 states that their inventories should be valued at fair value less costs to sell
This type of inventory is principally acquired with the purpose of selling in the near future and generating a profit from fluctuations in price or broker-traders’ margin
Measurement of cryptocurrency (intangible asset)
same measurement model should be used for all assets in a particular asset class
cost model
revaluation model
if there is an active market
this may not be the case for all cryptocurrencies
However, cryptocurrencies are often traded on an exchange and therefore it may be possible to apply the revaluation model.
unusual for intangible assets to have active markets
revaluation increase
revaluation increase in P/L to reverse revaluation decrease previously recognised in the P/L
recognised in OCI
revaluation loss
recognised in P/L
recognised in OCI to reverse the revaluation increase previously recognised in OCI
IFRS 13, Fair Value Measurement
the fair value of cryptocurrencies should be determined using this standard
quoted price in an active market
provides the most reliable evidence of fair value
is used without adjustment to measure fair value whenever available.
the entity should determine the principal or most advantageous market for the cryptocurrencies.
defines an active market
judgement should be applied to determine whether an active market exists for particular cryptocurrencies
As there is daily trading of Bitcoin, it is easy to demonstrate that such a market exists
useful life is finite or indefinite
indefinite useful life is where there is no foreseeable limit to the period over which the asset is expected to generate net cash inflows for the entity
It appears that cryptocurrencies should be considered as having an indefinite life for the purposes of IAS 38
An intangible asset with an indefinite useful life is not amortised but must be tested annually for impairment.
Disclosure
certain amount of disclosure is required to inform users in their economic decision-making
As there is so much judgement and uncertainty involved in the recognition and measurement of crypotocurrencies
IAS 1 requires
an entity to disclose judgements that its management has made regarding its accounting for holdings of assets, in this case cryptocurrencies
if those are part of the judgements that had the most significant effect on the amounts recognised in the financial statements
IAS 10
Requires an entity to disclose any material non-adjusting events
This would include whether changes in the fair value of cryptocurrency after the reporting period are of such significance that non-disclosure could influence the economic decisions that users of financial statements make on the basis of the financial statements.