How should a crypto asset appear on the balance sheet? Georgina Kyriakoudes offers her take on the different accounting treatments for a very modern asset class
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This article was first published in the November/December 2018 International edition of Accounting and Business magazine.
On the basis of current accounting frameworks, and specifically in the light of IFRS Standards, it is unclear how crypto assets, including cryptocurrencies and digital tokens, should be accounted for.
Several national accounting standards bodies have published discussion papers, but as yet only Belarus has issued official national accounting standards for this new asset class. The Australian Accounting Standards Board (AASB) issued a detailed examination of the application of IFRS Standards to digital currencies back in December 2016, which has been the basis for commentary from many other national accounting standards bodies.
While confusion certainly exists, some common themes are emerging from these discussion papers. Three asset categories are widely accepted as applicable: financial instruments, inventory and intangible assets.
However, discussions on treatment have so far focused on digital currencies, and not on the wider concept of crypto assets. As explained in the ‘Crypto confusion’ article in the September issue of AB, there are now a variety of crypto assets with different functions and features: cryptocurrencies, crypto commodities, utilities tokens and securities tokens.
In addition to a crypto asset’s features, the reason why a party obtained the asset (and how it did so) needs to be considered. For example, defining a token as an intangible asset under IAS 38 raises an issue if the purpose is to sell that crypto asset, as it would then be classed as ‘held for sale’ and so excluded from the scope of IAS 38; it would perhaps need to become inventory under IAS 2.
Belarus decided its accounting treatment based on the purpose and method of obtaining the asset and its subsequent use. Using a similar approach for the different categories of crypto assets and applying current IFRS definitions, the accounting treatments could be as follows:
- Purpose: Payment for services
Where cryptocurrencies are used as a payment, or receipt of payment, method between parties, they act as a medium of exchange and so can be treated as cash or a cash equivalent. However, cash equivalents are expected to require support by a central bank, and to date only Japan, Venezuela and the Marshall Islands have recognised cryptocurrencies as legal tender.
Also, cash equivalents are defined as ‘subject to an insignificant risk of changes in value’, which is not the case with cryptocurrencies, given their high volatility. National accounting standards boards have accordingly concluded that cryptocurrencies cannot be classed under IAS 7, Statement of Cash Flows.
Alternatively, a financial instrument (the Belarus choice) or intangible asset may be applicable. Under IAS 38, cryptocurrency meets the definition of an ‘identifiable non-monetary asset without a physical substance’ with an indefinite useful economic life. The initial measurement would be cost. As an active market generally exists, the option to measure the asset at fair value could be considered.
- Purpose: Received via mining activities
Where the party obtains the crypto asset as part of cryptocurrency mining activity, it would be treated as a finished good (ie inventory), with the actual cost of its production (such as IT and electricity resources) serving as the measurement criteria.
- Purpose: For implementing token rights
Crypto commodities and utility tokens are purchased for the use of the services the asset provides. For example, purchasing the golem crypto asset gives you the right to use distributed computing power. In this case, the asset has a contractual provision and can be classed as a financial instrument (IFRS 9) with a fair value through profit or loss valuation. Belarus standards use the purchase and transaction cost for initial recognition.
- Purpose: For trading or capital growth
While ideally this applies only to securities tokens, in reality any crypto asset with an active market may be held as an investment. As a ‘held for sale’ asset, the most appropriate treatment seems to be IAS 2, Inventory. Given an active market, the appropriate measurement would probably be the market price at the balance sheet date, with changes recognised in profit or loss. This treatment is particularly applicable for commodity brokers holding the crypto assets on behalf of clients.
- Purpose: Own token creation
Belarus standards explicitly state that parties that create their own crypto assets will not be allowed to recognise them. However, under IFRS an intangible asset may be recognised if the asset will generate future economic benefit and the cost of the asset can be reliably measured. Given that many tokens are actively traded, it is possible that these two criteria can be met.
While applying IFRS Standards based on the substance of transactions seems to make the most sense, it leaves the issue of the same asset being classified under different IFRS Standards. The consequence is judgment-based classifications and issues in the comparability and understandability of financial statements – core principles of the IFRS framework.
A separate standard would be more beneficial, but at its current stage the asset class may not be material enough to warrant full standard setting. The AASB proposed developing standards that would cover digital currencies as well as address the wider issue of a lack of clarity and standards in accounting for intangible assets and commodities such as water or emission rights.
As the ascent of crypto assets continues and the big rise in the value of these increasingly widely owned assets becomes material, accountants and auditors alike need guidance to be able to reach a conclusion on the completeness and accuracy of the financial statements and to ensure that those statements provide useful and relevant information to users.
Georgina Kyriakoudes FCCA, co-founder, Dcentric.Solutions
CPD technical article
"Treatment based on the substance of transactions lead to the same asset being classified differently"