How should accountants report cryptocurrencies under IFRS?

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How should accountants report cryptocurrencies under IFRS?

Mar 3, 2024 | IFRS

The rise of cryptocurrencies, such as Bitcoin, Ethereum, and others, has brought about significant changes to the global financial landscape. As these digital currencies gain wider acceptance, businesses and individuals need to understand how to account for cryptocurrency transactions in accordance with International Financial Reporting Standards (IFRS) for financial reporting purposes. This article aims to provide an overview of the accounting considerations and guidelines for cryptocurrency transactions under IFRS.

According to the International Accounting Standards Board (IASB), an item is cryptocurrency if it meets the following criteria[1]:

  1. a digital or virtual currency recorded on a distributed ledger that uses cryptography for security.
  2. not issued by a jurisdictional authority or other party.
  3. does not give rise to a contract between the holder and another party.

Accounting treatment in terms of IFRS:

There are three potential classifications of cryptocurrency in terms of IFRS considered below:

  • An intangible asset,
  • An item of inventory
  • Or a financial asset.

 

An intangible asset is an identifiable non-monetary asset without phyisical substance.[2]

 

Holding of cryptocurrency would meet the definition of an intangible asset in terms of IAS 38 Intangible Assets on the grounds that

(a) it is capable of being separated from the holder and sold or transferred individually; and

(b) it does not give the holder a right to receive a fixed or determinable number of units of currency.

Cryptocurrencies that are classified as intangible assets will be measured initially at cost as required by IAS 38. They will subsequently be accounted for at cost less amortisation and impairment under the cost model. They could be accounted for under the revaluation model if there is an active market for them which may not be the case for all intangible assets.

IAS 2 Inventories would apply to inventories of intangible assets, as inventories are assets:

  1. held for sale in the ordinary course of business;
  2. in the process of production for such sale; or
  3. in the form of materials or supplies to be consumed in the production process or in the rendering of services.

Therefore, a company holding cryptocurrencies for sale in the ordinary course of business, should classify such as inventory. This would likely be the case for entities that mine cryptocurrency. In accordance with IAS 2, inventory is held at the lower of cost and net realiseable value meaning that cryptocurrency would be written down in instances where the asset loses value subsequent to purchase.

Cryptocurrencies would not meet the definition of a financial asset because it, like a gold coin, does not give rise to a contractual right to receive cash.

Impact on financial statements:

In the context of holding cryptocurrencies, the following disclosures would be necessary:

  1. An entity provides the disclosures required by IAS 2 for cryptocurrencies held for sale in the ordinary course of business;
  2. If an entity measures holdings of cryptocurrencies at fair value, disclosures in terms of IFRS 13 Fair Value Measurement need to be adhered to.
  3. an entity discloses judgements that its management has made regarding its accounting for holdings of cryptocurrencies if those are part of the judgements that had the most significant effect on the amounts recognised in the financial statements. For instance, judgements as to whether there is an active market in order to apply the revaluation model under IAS 38.
  4. Disclose details of any material non-adjusting events, including information about the nature of the event and an estimate of its financial effect (or a statement that such an estimate cannot be made). For example, an entity holding cryptocurrencies would consider whether changes in the fair value of those holdings 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.

In conclusion, by adhering to IFRS guidelines, entities can ensure consistent and reliable financial reporting. As the cryptocurrency landscape continues to evolve, entities should stay abreast of regulatory developments and adapt their accounting practices accordingly to meet the challenges and opportunities presented by this dynamic asset class. The IASB believes that sufficient guidance has been provided in accounting for cryptocurrencies and has hence not added this project to their workplan.

Written by KC Rottok Chesaina, Chief IFRS Officer at Financial Minds – email ask@fineminds.co.za 

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