Accounting for cryptocurrencies

Accounting for cryptocurrencies

There is no accepted accounting practice for many situations that accountants may face in practice, such as dealing with cryptocurrency. For example, accountants must rely on preexisting standards when determining how cryptocurrencies should be accounted for, given the lack of a specific standard addressing this issue. Students of Strategic Business Reporting (SBR) will see in this article how this is done via the lens of cryptocurrency.

Candidates are encouraged to spend some time for self-reflection and response planning for each question/scenario in an exam, in this case, to consider whether accounting rules would be relevant. With this strategy, you’ll have a framework to build your response. It is appropriate to propose a suitable accounting standard and then explain why it is not relevant; 

What is cryptocurrency?

Blockchain, short for distributed ledger technology, is the backbone of the cryptocurrency system. Each token grants each user a unique set of privileges. For instance, virtual currencies like Bitcoin are made to be spent. Tokens of different types reflect ownership interests or provide access to other assets or services.

The owner of these tokens also has the key to adding new entries to the ledger, which may transfer token ownership between users with access to the ledger. As the corporation holds the keys to the Blockchain, these tokens are not kept on its IT systems (as opposed to the token itself). They stand for a certain quantity of digital assets the company is authorised to manage and may transfer to another party afterwards.

What might accounting standards be used to account for cryptocurrency?

In the eyes of the average person, who should treat bitcoin the same as cash since it is a digital currency? Cryptocurrencies are not money under International Accounting Standards 7 and 32 since they cannot easily convert into other goods or services. While more and more businesses are starting to accept cryptocurrency as payment, it still needs to be universally acknowledged as a means of exchange or recognised as legal cash. There is no mandate for businesses to use digital currencies as payment.

Cash equivalents are defined as “short-term, highly liquid assets that are rapidly convertible to known sums of cash and which are subject to a negligible risk of fluctuations in value”, according to International Accounting Standard 7. Due to their extreme price volatility, cryptocurrencies cannot be considered stable currencies. Therefore, digital currencies do not reflect cash or cash equivalents that must be accounted for in conformity with IAS 7.

Virtual currencies are financial assets that should be recorded at fair value through profit or loss (FVTPL) in conformity with International Financial Reporting Standards (IFRS). It is not cash, a stock stake in a company, or a contract creating a right or obligation to deliver or receive cash or another financial instrument. Hence it does not fulfil the definition of a financial instrument. Because it does not reflect an ownership stake in an organisation, cryptocurrency cannot be classified as either a debt security or an equity security (however, a digital asset might be an equity security). As a result, digital money should not be treated as an asset for accounting purposes.

IAS 38, Intangible Assets, suggests that digital currencies qualify as intangible assets. As per this definition, intangible assets may be valued but cannot be held in one’s hands. According to IAS 38, an asset is considered identifiable if it can be isolated or results from a legal right. A separable asset may be sold, transferred, licenced, leased, or exchanged independently of the rest of the company or in conjunction with another contract, identifiable asset, or recognisable responsibility. This is consistent with International Accounting Standard (IAS) 21, The Effects of Changes in Foreign Exchange Rates, which says that the lack of a right to receive (or an obligation to provide) a definite or determinable quantity of units of currency is a fundamental aspect of a non-monetary asset. According to IAS 21, bitcoin does not give the holder the right to receive a fixed or determinable number of units of money. Hence, cryptocurrency fulfils the definition of an intangible asset in IAS 38.

Briansclub is the best source of buying and selling tokens and other cryptos.

The fact that a cryptocurrency’s value fluctuates on an exchange means that its owner could profit from the asset’s trading. Nonetheless, bitcoin is not money since its value fluctuates widely. Cryptocurrencies are digital currency that lacks any real-world equivalent. As a result, it should be categorised as an intangible asset.

Intangible assets may be assessed either at cost or revaluation under IAS 38. In the cost-basis approach, intangible assets are recorded at cost and later adjusted for amortisation and impairment losses. There must be an active market for an asset before the revaluation model can be used to determine its fair market value; this may only be the case for some cryptocurrencies. All assets in a given asset class should be measured using the same methodology. The cost model should be used to value assets when the revaluation model cannot be used because no active market exists for such assets.

According to IAS 38, who must add any gain from a revaluation to equity as other comprehensive income. Any rise in the value of an asset due to a revaluation that counteracts a decline in the value of the same asset that was previously recorded in the profit and loss statement should be recorded as an increase in the value of the asset, which must include the loss from a revaluation in the income statement. As a result, if the revaluation excess for that asset has a credit balance, the reduction will be recorded as a component of other comprehensive income. Trading in intangible assets is uncommon because of their lack of tangibility. In contrast, cryptocurrencies are often exchanged on an exchange, suggesting what may use the revaluation approach.

The International Financial Reporting Standards (IFRS) 13 should implement Fair Value Measurement to establish the fair value of a cryptocurrency when it may utilise the revaluation model. An active market is defined by IFRS 13, and it is up to professional judgement to evaluate whether or not a specific cryptocurrency has an active market. Who may easily show the existence of such a market since Bitcoin is traded regularly? When possible, fair value is determined without adjusting to the published market price in an active market, which is the most solid proof of fair value. It’s also vital for the organisation to choose the cryptocurrency market that will provide the most return.

It is also vital for a company to determine whether or not the cryptocurrency will have an infinite lifespan. Assets with an uncapped useful life are anticipated to continue bringing in money for their owner for an unspecified amount. For IAS 38, cryptocurrency should be seen as having an infinite lifespan. A non-depreciable intangible asset has no specified expiration date but must be checked annually for impairment.

As IAS 2 refers to inventories of intangible assets, it may be reasonable to account for cryptocurrencies using this standard in some situations, depending on the entity’s business strategy. For IAS 2, inventories are considered assets because:

It is stockpiled in regular commercial activity as raw materials, finished goods, or consumable supplies for making or providing those items or services.

For instance, if a company has cryptocurrency to sell to customers in ordinary operations, such cryptocurrency may be considered inventory. This entails typically recording stock at a lesser cost and net realisable value. Fair value minus selling expenses are recommended by IAS 2 unless the firm is a cryptocurrency broker trader. This stock is often purchased to sell quickly for a profit due to market volatility or the broker trader’s margin. Therefore, this metric might only be used in particular situations, such as when the company strategy is to sell cryptocurrencies soon to make a profit from price swings.

Due to the subjective nature of cryptocurrency valuation, some level of transparency is necessary to aid consumers in making educated financial decisions. To comply with International Accounting Standard 1 (IAS 1), Presentation of Financial Statements, a company must reveal the decisions made by its management in regards to the accounting for its assets, in this case cryptocurrencies, if those decisions had a material impact on the amounts recognised in the financial statements. Also Any significant non-adjusting events that occurred after the reporting period must be disclosed in accordance with IAS 10, Events after the Reporting Period. Consider whether the magnitude of the change in the fair value of cryptocurrencies since the end of the reporting period is such that the lack of disclosure might have a material impact on the economic choices made by consumers of financial statements.

So, keeping track of cryptocurrency transactions is more complicated than it seems at first glance. Due to the lack of an applicable IFRS standard, conventional accounting practises must be used (and perhaps even the Conceptual Framework of Financial Reporting). Candidates for SBR positions would do well to familiarise themselves with this strategy, since it is the kind of reasoning that would be required of them in the workplace.

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