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How to Account for Cryptocurrency under IFRS.

This edition provides guidance on some of the basic issues encountered in accounting for holding of cryptocurrencies, focussing on Classifying Cryptocurrencies within the IFRS Framework.

Intangible Asset vs. Financial Asset Classification

What’s the issue?
The popularity of cryptocurrencies has soared in recent years, yet they do not fit easily within IFRS’ financial reporting structure. For example, an approach of accounting for holdings of cryptocurrencies at fair value through profit or loss may seem intuitive but is incompatible with the requirements of IFRS in most circumstances.

US GAAP and IFRS In Digital Asset Accounting
Explore the key differences between US GAAP and IFRS to determine which framework best aligns with your accounting practices. Click to read more ▶

International Accounting Standards reviewed:

This article explores the accounting methods for digital asset holdings within the framework of IFRS, referencing the clarification provided by IFRIC in June 2019

For detailed insights into the impact of the latest rules on digital asset accounting, see “How New Rules will Affect Digital Asset Accounting.

Cash and cash equivalents:

IAS 7 and IAS 32 provide guidelines on what constitutes cash and cash equivalents and financial instruments respectively

IAS 7 

Definitions

The following terms are used in this Standard with the meanings specified:

  • Cash comprises cash on hand and demand deposits.
  • Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value

IAS 32

Definitions

The Standard defines a financial asset as being “any asset that is:

  1. cash
  2. an equity instrument of another entity
  3. a contractual right:
    i to receive cash or another financial asset from another entity; or
    ii to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity
  4. a contract that will or may be settled in the entity’s own equity instruments and is:
    i a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or
    ii a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments…” 
Technical Insights: 
"While traditional currency and demand deposits are considered cash, cryptocurrencies lack the characteristics of cash due to their limited acceptance and price volatility. Thus, they cannot be classified as cash or cash equivalents.

The definition of a financial asset is also not met for most cryptocurrencies. If any further support is needed, it is notable that IFRS 9 considers the question of whether gold bullion is a financial instrument in its guidance on implementing the Standard. 

IFRS 9 notes that although gold bullion “is highly liquid, there is no contractual right to receive cash or another financial asset inherent in bullion” and is therefore not a financial instrument. The same could be said of a cryptocurrency holding."

Inventory: 

Accounting treatment for cryptocurrencies varies based on the entity’s business model. For entities engaged in buying and selling cryptocurrencies, IAS 2 could apply, recognizing them at the lower of cost or net realizable value. 

IAS 2 Inventories

Definitions

The following terms are used in this Standard with the meanings specified:

Inventories are assets:

  • (a) held for sale in the ordinary course of business;
  • (b) in the process of production for such sale; or
  • (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.


Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. (See IFRS 13 Fair Value Measurement.)

Scope

This Standard does not apply to the measurement of inventories held by:

  • (a) producers of agricultural and forest products (…)
  • (b) commodity broker-traders who measure their inventories at fair value less costs to sell.

When such inventories are measured at fair value less costs to sell, changes in fair value less costs to sell are recognised in profit or loss in the period of the change.

Technical Insights: 
"However, the interpretation of the exception for commodity broker-traders in the context of cryptocurrencies is unclear. 

Given the lack of clarity surrounding this exception, we believe that it can only be applied in very limited circumstances involving a business model in which cryptocurrencies are acquired with the intention of selling them in the near future to make a profit from price fluctuations or broker-traders' margins."

Intangible asset: 

Cryptocurrency holdings meet the criteria of an intangible asset under IAS 38, as they lack physical form but offer future economic benefits. 

IAS 38 Intangible Assets

Scope

This Standard shall be applied in accounting for intangible assets, except:

  • (a) intangible assets that are within the scope of another Standard;
  • (b) financial assets, as defined in IAS 32 Financial Instruments: Presentation;
  • (c) the recognition and measurement of exploration and evaluation assets (see IFRS 6 Exploration for and Evaluation of Mineral Resources);and
  • (d) expenditure on the development and extraction of minerals, oil, natural gas and similar non-regenerative resources.

If another Standard prescribes the accounting for a specific type of intangible asset, an entity applies that Standard instead of this Standard. For example, this Standard does not apply to:

  • (a) intangible assets held by an entity for sale in the ordinary course of business (see IAS 2 Inventories).
  • (b) deferred tax assets (see IAS 12 Income Taxes).
  • (c) leases of intangible assets accounted for in accordance with IFRS 16 Leases.
  • (d) assets arising from employee benefits (see IAS 19 Employee Benefits).
  • (e) financial assets as defined in IAS 32. The recognition and measurement of some financial assets are covered by IFRS 10 Consolidated Financial Statements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures.
  • (f) goodwill acquired in a business combination (see IFRS 3 Business Combinations).
  • (g) contracts within the scope of IFRS 17 Insurance Contracts and any assets for insurance acquisition cash flows as defined in IFRS 17.
  • (h) non-current intangible assets classified as held for sale (or included in a disposal group that is classified as held for sale) in accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations.
  • (i) assets arising from contracts with customers that are recognised in accordance with IFRS 15 Revenue from Contracts with Customers.

Definitions

The following terms are used in this Standard with the meanings specified: Amortisation is the systematic allocation of the depreciable amount of an intangible asset over its useful life.

An asset is a resource:

  • (a) controlled by an entity as a result of past events; and
  • (b) from which future economic benefits are expected to flow to the entity.
Technical Insights: 
"Entities have the option to account for them using the cost model or revaluation model.
- In the cost model, assets are initially measured at acquisition cost and amortized. 
- In the revaluation model, assets are measured at fair value with changes recorded in financial statements.

Digital assets often have indefinite useful lives, requiring regular impairment tests. However, the revaluation model requires an active market and reliable fair value measurement, feasible for cryptocurrencies traded on liquid exchanges.

For Real World Asset (RWA) tokens, the analysis of T&Cs is extremely important. These may land in the financial instruments category."

Financial asset: 

The classification of cryptocurrencies as financial assets under IFRS depends on whether they meet the criteria outlined in IAS 32

IAS 32 Financial asset.

Definitions

The following terms are used in this Standard with the meanings specified:

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

A financial asset is any asset that is:

  • (a) cash;
  • (b) an equity instrument of another entity;
  • (c) a contractual right:
    (i) to receive cash or another financial asset from another entity; or
    (ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity; or
  • (d) a contract that will or may be settled in the entity’s own equity instruments and is:
    (i) a non-derivative for which the entity is or may be obliged to receive a variable number of the entity’s own equity instruments; or
    (ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments.

For this purpose the entity’s own equity instruments do not include puttable financial instruments classified as equity instruments in accordance with paragraphs 16A and 16B, instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments in accordance with paragraphs 16C and 16D, or instruments that are contracts for the future receipt or delivery of the entity’s own equity instruments.

A financial liability is any liability that is:

  • (a) a contractual obligation:
    (i) to deliver cash or another financial asset to another entity; or
    (ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially unfavourable to the entity; or
  • (b) a contract that will or may be settled in the entity’s own equity instruments and is:
    (i) a non-derivative for which the entity is or may be obliged to deliver a variable number of the entity’s own equity instruments; or
    (ii) a derivative that will or may be settled other than by the exchange of a fixed amount of cash or another financial asset for a fixed number of the entity’s own equity instruments. For this purpose, rights, options or warrants to acquire a fixed number of the entity’s own equity instruments for a fixed amount of any currency are equity instruments if the entity offers the rights, options or warrants pro rata to all of its existing owners of the same class of its own non-derivative equity instruments. Also, for these purposes the entity’s own equity instruments do not include puttable financial instruments that are classified as equity instruments in accordance with paragraphs 16A and 16B, instruments that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation and are classified as equity instruments in accordance with paragraphs 16C and 16D, or instruments that are contracts for the future receipt or delivery of the entity’s own equity instruments.
Technical Insights:  
While most cryptocurrencies do not grant a contractual right to receive cash, stablecoins with redemption conditions may qualify as financial assets, presenting a unique accounting challenge. 

Entities must carefully assess the specific terms and conditions of each cryptocurrency to determine its appropriate accounting treatment. 

This nuanced approach is especially relevant when considering the implications of staking income, a growing aspect of cryptocurrency management.

Conclusion

The most fitting classification for cryptocurrencies, given their current treatment under IFRS, appears to be as intangible assets under IAS 38

This classification acknowledges the non-physical nature of cryptocurrencies and their potential to provide future economic benefits. This is particularly relevant for cryptocurrencies traded on liquid exchanges, where fair value can be more readily determined.

While the current IFRS framework provides a basis for the classification and accounting of cryptocurrencies, the distinctive nature and rapid innovation in the cryptocurrency market call for ongoing vigilance and adaptability in accounting practices. Although the treatment under IAS 38 is a starting point, it is subject to change as the market evolves and as further guidance becomes available from regulatory bodies.

Credits and Acknowledgment

This article was developed from commentary, notes and expertise of Chetan Hans, Partner at Grant Thornton Singapore. Using as a source the following insight article from Grant Thornton Global: https://www.grantthornton.global/globalassets/1.-member-firms/global/insights/article-pdfs/ifrs/ifrs-viewpoint-9—accounting-for-cryptocurrencies–the-basics.pdf

Authors

  • Chetan Hans

    Chetan is the Partner – CFO services at Granth Thornton Singapore. He has more than 16 years of experience in servicing large national and multinational clients in the areas of Assurance, Indian GAAP, US GAAP and IFRS technical accounting advisory, specifically in the areas of financial instruments, leases, consolidation, revenue recognition, business combinations, and cryptoassets/ cryptocurrencies.

  • Ariel Eiberman

    Ariel Eiberman is the marketing lead at Cryptoworth, a leading crypto accounting software that helps web3 accountants speed up month-end closing. He has more than 6 years of experience in product marketing for software companies and a background of organizing olympic games and polyglot meetups in multiple cities.

Chetan Hans

Chetan is the Partner – CFO services at Granth Thornton Singapore. He has more than 16 years of experience in servicing large national and multinational clients in the areas of Assurance, Indian GAAP, US GAAP and IFRS technical accounting advisory, specifically in the areas of financial instruments, leases, consolidation, revenue recognition, business combinations, and cryptoassets/ cryptocurrencies.

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