Cryptocurrencies & The Impact on Accountants
Cryptocurrencies relate to digital money and are also known as digital or virtual currencies. Cryptocurrency was invented in the 21st century and the use of cryptocurrency, Bitcoin, began in 2009. This has allowed the world to make transactions electronically in a similar way to standard currencies that use physical cash. When comparing cryptocurrency to standard currencies, cryptocurrencies have no legal tender status which means that there is no legal obligation for them to be accepted while standard currencies are the country’s officially recognised currency and must be accepted as payment of a debt. Standard currencies are also regulated by a central bank while cryptocurrencies are unregulated and decentralised which means that there are no central bank guarantees on them or controls their supply.
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What does this mean for accounting for Cryptocurrencies for accountants? As cryptocurrency is only on the rise in recent years, there is no current specific standard that accountants can apply when it comes to cryptocurrencies.-
Many have questioned if cryptocurrencies should be treated as another form of cash, however per IAS 7 Statement of Cash Flows, cash comprises cash on hand and demand deposits while IAS 32 Financial Instruments Presentation, states that currency is a financial asset because it represents the medium of exchange. Although cryptocurrency is becoming more established and accepted, it cannot be readily exchanged for all goods or services. IAS 7 also defines cash equivalents as short-term, highly liquid investments that are readily convertible to known cash amounts and subject to an insignificant risk of changes in value. Given the considerable price volatility in cryptocurrencies, entities have not sought to apply policies where they define holdings in crypto assets as cash or cash equivalents.-
When there are no specific standards, the guidance, and methodologies that accountants appear to follow when deciding on how to account for these assets are the principles of accounting for intangible assets or accounting for inventory.-
As per IAS 38 Intangible Assets defines an intangible asset as “an identifiable non-monetary assets without physical substance”. When we break this down, an identifiable asset is capable of being separated or divided from the entity and sold, transferred, licenses, rented or exchanged. Cryptocurrency can be traded and are therefore identifiable. IAS 38 defines monetary assets as money held and assets to be received in fixed or determinable amounts of money. The value of cryptocurrency is subject to major variations arising from supply and demand. As a result, its value is not fixed and determinable therefore it is non-monetary. As cryptocurrency is digital money, it does not have a physical substance.-
When applying these 3 characteristics defined by IAS 38, it is logical for many companies to account for cryptocurrencies under intangible assets and can be utilised for the following two approaches:- Cost – cryptocurrency asset is carried at cost less accumulated amortisation and impairment. In applying this approach, companies must determine if the asset has a finite or indefinite useful life. As cryptocurrencies can act as a reserve of value over time, they have an indefinite useful life, meaning the asset would not be subject to an annual amortisation charge. Instead, an annual impairment review would be necessary.
- Revaluation – under IAS 38, intangible assets can be carried at their revalued amount as determined at the end of each reporting period. To adopt this approach, the asset must be capable of reliable measurement. While active markets are often uncommon for intangible assets, where cryptocurrencies are traded on an exchange, it may be possible to apply the revaluation model. To present increases and decreases correctly, entities must be able to track movements in sufficient detail across their holdings.