As the popularity and adoption of blockchain technology continue to grow, so does the significance of understanding the accounting treatment of crypto assets and cryptocurrencies. This guide aims to provide a comprehensive overview of accounting considerations for these digital assets under International Financial Reporting Standards (IFRS).
What are Crypto assets?
A crypto asset is any digital asset built using blockchain technology. This includes cryptocurrencies, stablecoins such as Tether (USDT) which are assets designed to track the price of an underlying asset therefore minimising price volatility, and security tokens which are the digital form of traditional equity or fixed income securitie.
What are Cryptocurrencies?
Cryptocurrencies are a subcategory of crypto assets. They are designed to work as a medium of exchange, store of value or to power applications. The IFRS Interpretations committee considered cryptocurrencies with all the following characteristics:
How are they accounted for in the books of the holder?
The accounting treatment of cryptocurrencies will primarily depend on the intentions of the entity holding them and the way these assets are held e.g., whether the entity is holding the crypto assets directly or its crypto assets are held through a crypto – exchange.
The IFRS Interpretations Committee concluded that IAS 2 Inventories applies to cryptocurrencies when they are held for sale in the ordinary course of business. If IAS 2 is not applicable, an entity applies IAS 38 Intangible assets to holdings of cryptocurrencies.
IAS 2 Inventory
Inventories include assets that are held for sale in the ordinary course of business, assets in the production process for sale in the ordinary course of business, and materials and supplies that are consumed in production.
IAS 2 does not require inventory to be tangible.
IAS 2 requires measurement at the lower of cost and net realisable value
The costs of an acquired crypto asset would normally comprise its purchase price and any costs directly attributable to the acquisition of the crypto asset, such as processing fees. As per IAS 2 net realisable value is defined as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.
Fair value less cost to sell
A commodity broker-trader acquires and sells crypto assets to generate profits from price fluctuations or broker traders’ margin. These assets are therefore held for sale in the ordinary course of business. In such a scenario, the commodity broker-trader has the option to measure their inventory of crypto-assets at fair value less costs to sell. However, without an active market’s determination of an assets fair value, determining the fair value would be very challenging for the entity.
IAS 38 Intangible asset
An intangible asset is defined as an identifiable non-monetary asset without physical substance. An asset is a resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity.
Therefore, the essential characteristics of the definition of intangibles are:
Crypto assets are accounted for as intangible assets with indefinite useful life and are initially measured at cost. The cost of acquiring crypto assets would generally involve expenses such as the buying price and additional transaction costs, which may include blockchain processing fees.
* It is important to note that these guidelines are not exhaustive, and the treatment of crypto assets under IFRS may vary depending on the nature and circumstances of the crypto asset. Companies should seek professional advice to ensure accurate accounting treatment of crypto assets under IFRS.