The required accounting for the holdings of cryptocurrencies, such as Bitcoin, Ripple or Litecoin, has recently caused much difficulty and divergence in practice, and with the ever rapidly-growing use of cryptocurrencies around the world, this issue is becoming much more pertinent. This is because, as yet, there are no specific requirements written into IFRS Standards (or UK GAAP or US GAAP).
However, during its March meeting, the IFRS Interpretations Committee (“Committee”) discussed how IFRS Standards should currently be applied to the holdings of cryptocurrencies, and as such the Committee has made some tentative decisions regarding how they should be treated for accounting and financial reporting purposes. The Committee acknowledges that the conclusions reached are so far tentative and hence invites comments to be submitted by 15 May 2019. After this time, the Committee will reconsider the tentative decisions, including the reasons for not adding this matter to a standard-setting agenda.
Summary – Tentative decisions made so far
The tentative conclusions reached by the Committee are:
- Holdings of cryptocurrencies do not meet the definition of a financial asset, nor cash under IAS 32 Financial Instruments: Presentation;
- Holdings of cryptocurrencies do meet the definition of inventory and should be accounted for under IAS 2 Inventories when they are held for sale in the ordinary course of business, which includes a broker-trader business; and
- Holdings of cryptocurrencies do meet the definition of an intangible asset and should be accounted for under IAS 38 Intangible Assets when they do not fall within the scope of IAS 2.
Scope – What are the characteristics of cryptocurrencies?
The Committee considered that cryptocurrencies have the following characteristics:
- A cryptocurrency is a digital or virtual currency that is recorded on a distributed ledger and uses cryptography for security.
- A cryptocurrency is not issued by a jurisdictional authority or other party.
- A holding of a cryptocurrency does not give rise to a contract between the holder and another party.
Where to begin – Cash?
The, seemingly, most obvious IFRS Standard to consider first is IAS 32 Financial Instruments: Presentation (“IAS 32”), which contains the definition of a financial asset. This is because, by the nature of the word, a cryptocurrency may suggest a form of cash. IAS 32.11 defines a financial asset as “any asset that is:
- an equity instrument of another entity;
- a contractual right to receive cash or another financial asset from another entity;
- a contractual right to exchange financial assets or financial liabilities with another entity under particular conditions; or
- a particular contract that will or may be settled in the entity’s own equity instruments.”
And IAS 32.AG3 states that: “currency (cash) is a financial asset because it represents the medium of exchange and is therefore the basis on which all transactions are measured and recognised in financial statements. A deposit of cash with a bank or similar financial institution is a financial asset because it represents the contractual right of the depositor to obtain cash from the institution or to draw a cheque or similar instrument against the balance in favour of a creditor in payment of a financial liability.”
However, when considering a holding of cryptocurrency, the Committee tentative concluded that it does not meet any of the definition’s criteria to be a financial asset, nor does it meet the full definition of cash. Specifically, it does not meet the definition to be cash because, even though some cryptocurrencies can be, and are, used as a medium of exchange (i.e. used in exchange for goods or services), the Committee is not aware of any cryptocurrencies that are used as the monetary unit in pricing goods and services to such an extent that it would be the basis on which all transactions are measured and recognised in financial statements. Accordingly, cryptocurrencies represent some, but not all, of the characteristics of cash.
Where next – What is the nature of cryptocurrencies?
Cryptocurrencies are purely digital in nature and understandably do not have physical substance, therefore an obvious next step is whether they meet the definition of an intangible asset under IAS 38 Intangible Assets (“IAS 38”). IAS 38.8 states an intangible asset is: “an identifiable non-monetary asset without physical substance”, and IAS 38.12 states: “an asset is identifiable if it is separable (i.e. is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, identifiable asset or liability), or arises from contractual or other legal rights.”
The Committee tentatively concluded that, along with the guidance provided in IAS 21 The Effects of Changes in Foreign Exchange Rates (“IAS 21”), the holding of cryptocurrency meets the definition of an intangible asset 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.
However, IAS 38 applies to the accounting for all intangible assets except:
- those that are within the scope of another Standard;
- financial assets, as defined in IAS 32 Financial Instruments: Presentation;
- the recognition and measurement of exploration and evaluation assets; and
- expenditure on the development and extraction of minerals, oil, natural gas and similar non-regenerative resources.
The Committee therefore also needed to consider whether there were any other IFRS Standards that cryptocurrencies may fall into the scope of; namely IAS 2 Inventories (“IAS 2”). Given that cryptocurrencies are often purchased with the intention of reselling or are mined, and the fact that IAS 2 does not scope out intangible assets, then consideration under this Standard does seem logical as well.
IAS 2.6 defines inventories as “assets:
- held for sale in the ordinary course of business;
- in the process of production for such sale; or
- in the form of materials or supplies to be consumed in the production process or in the rendering of services.”
The Committee tentatively decided therefore that IAS 2 may be the applicable Standard to account for holdings of cryptocurrencies, depending upon the nature in which they are held, for instance if the cryptocurrencies are held for the purpose of:
- selling in the ordinary course of business, then IAS 2 will apply; or
- buying or selling in the near future and for generating a profit from fluctuations in price or broker-traders’ margin (i.e. a broker-trader purpose), then the specific requirements in IAS 2.3(b) will apply to account for the inventories at fair value less costs to sell.
Conclusions – What are the next steps?
The Committee are inviting comments to their tentative decisions to be submitted by 15 May 2019.
Accordingly, this means that even though the Committee believe that the existing requirements of IFRS Standards are currently adequate in establishing appropriate accounting policies for the holdings of cryptocurrencies, this is subject to discussion. It also means that, whilst the Committee believes that the appropriate accounting policy should depend upon the purpose of the cryptocurrencies being held, and so they may be held at cost or fair value, they should never be accounted for as cash or another financial asset, but do you agree?
By Jessica Howard, Financial Reporting Advisory Director