Accounting for Cryptocurrency: How to treat these digital assets in our books

Cryptocurrency Accounting

For a lot of folks out there, the most important thing they want to know about cryptocurrency is, how is it going to make me money? However, for accountants, it’s important to understand how to reliably and consistently treat these new-age digital assets in our books!

There are now over 6000 cryptocurrencies on the market worldwide. It is estimated one in six Australians own cryptocurrency, with this figure expected to rise rapidly.

With the growing interest in cryptocurrency, they are fast on their way to becoming mainstream in Australian businesses. But many industries such as accounting are scrambling to keep up with the emerging needs of digital currencies, and the regulatory and compliance frameworks are lagging.

Before we delve into the nitty-gritty of accounting for cryptocurrency, let’s discuss
what exactly is cryptocurrency?

In a nutshell, cryptocurrencies are digital tokens protected with cryptography (a complex set of algorithms). Cryptocurrency works on blockchain technology. The blockchain is a collection of shared records on a publicly distributed ledger, making it very secure and impossible to counterfeit. There is no physical form (as opposed to fiat money), and generally, a government or central authority does not issue it. Instead, the tokens are mined by solving complex mathematical equations.

Cryptocurrency can be purchased from a crypto exchange, and the tokens stored in a digital wallet. Tokens may be used as a method of payment for goods and services. Alternatively, tokens may be used for trading or held for long term investment, for example, in a Self-managed super fund (SMSF).

Currently, in Australia and internationally, no specific Accounting standards detail the treatment of cryptocurrency. The Australian Accounting Standards Board (AASB) has identified “Cryptocurrencies and related transactions” as an ongoing project. However, no further insights are provided.

You might be wondering, can cryptocurrency be treated the same as cash? It is a “currency” after all. Cryptocurrency does not meet the definition of cash and cash equivalent under IAS 7 and IAS 32. Cryptocurrency is not used to a large enough extent as a means of exchange for goods or services. It is not used as the monetary unit in the pricing of goods and services and is not used to measure and recognize transactions in financial statements.

You may also be wondering whether cryptocurrency could be treated as a financial instrument? Cryptocurrency does not meet the definition of a financial asset under IAS 32. As described above, it is not cash, not an equity interest in an entity, and it is not legal tender.

So what is the right way to treat cryptocurrency?

It depends on the purpose of your holdings. In June 2019 International Financial Reporting Standards Interpretation Committee (IFRS IC) published an agenda paper describing that cryptocurrency meets the definition of an intangible asset under IAS 38 – Intangible Assets. It also stated that cryptocurrency met the definition of IAS 2 – Inventory if the cryptocurrency is held for the purpose of sale in the ordinary course of business. If IAS 2 did not apply, then IAS 38 would be applicable.

On December 10 2020, ASAF Agenda Paper 2 ( AP2: Accounting for Crypto-assets (Liabilities) expressed a need for further clarity on accounting requirements due to the limited scope in the 2019 IFRS IC agenda paper. The discussion paper was open for comment and outlined some possibilities moving forward with the accounting treatment. These are:

Maintain the current convention of using IAS 38/IAS 2 to account for cryptocurrency.
Amendments to the definition and scope of the existing IRFS standards.
a. IAS 7 – Amend the definition of cash and cash equivalent.
b. IAS 32 – Amend the definitions of financial instruments, financial assets and financial liabilities.
c. Provide clarification across a range of related standards.
Develop new specific standards for crypto-assets and liabilities.

The agenda paper closed its appeal for comment on July 31 2021 – so we can expect to hear more in the future.

In summary

There no specific accounting standards for cryptocurrency.
The current accounting convention is to treat cryptocurrency holdings in accordance with IAS 38 and IAS 2.
Accounting for cryptocurrency is complex, and we expect more guidance with accounting standards to come.

References

Raynor de Best (2021, July 22), Quantity of cryptocurrencies as of July 22, 2021 [Website]. Available https://www.statista.com/statistics/863917/number-crypto-coins-tokens/

International Financial Reporting Standards (2019, June), Holding of Cryptocurrencies [Online], Available https://www.ifrs.org/content/dam/ifrs/meetings/2019/june/ifric/ap12-holdings-of-cryptocurrencies.pdf

Australian Accounting Standards Board (2021), AASB Research Forum 2022 Call for academic expressions of
interest [Online], Available https://aasb.gov.au/media/izuguamg/rf2022eoi_june2021.pdf

Evin Priest (2021, June 17), Cryptocurrency rising in Australia but risk remains biggest deterrent [Online],
Available https://www.theaustralian.com.au/breaking-news/cryptocurrency-rising-in-australia-but-risk-remains-biggest-deterrent/news-story/1adb60ca30da69fffdd68bc3acf82cc3