In recent years, the importance of adopting appropriate accounting standards for digital assets and cryptocurrencies has grown significantly.
At this point, all finance professionals, especially accountants and bookkeepers must know the key differences between the standards. The International Financial Reporting Standards (IFRS) is different to the Generally Accepted Accounting Principles (GAAP) in the United States.
Read this article until the end to get acquainted with its challenges and potential solutions towards harmonizing these standards.
The 3-Core Differences:
1. Recognition and Measurement:
Most companies following IFRS will recognize digital assets at their fair value. Other companies following US GAAP must use a cost plus impairment model. This leads to significant differences in the resulting financial statements for companies using IFRS versus US GAAP. Let’s explore this in more detail:
Under IFRS, there’s no prescriptive specification. These digital assets could be accounted for as inventory, cash, or financial instruments. The common practice, so far, is to classify cryptocurrencies as intangible assets. This model follows the guidance in IAS 38. That requires to define crypto assets as identifiable non-monetary assets with no physical substance.
They are initially recognized at cost value on the date of acquisition. Subsequently, they are measured at cost or fair value, depending on the accounting policy chosen by the organization. It is typical to recognize changes in fair value inside the income statement.
Under US GAAP, on the other side, cryptocurrencies are also intangible assets but without specific guidance on the classification of these assets. Resulting in diverse practices across different companies. This empowers businesses to be more creative but makes practices less repeatable across the industry. For example, when classifying intangible assets the accounting practice should follow a historical cost approach under ASC 350. Keeping balance sheet at Cost minus Impairment. Such impairment when value crosses below cost, must be performed at the individual lot level. That makes the accounting practice even more challenging.
Impairment testing is specifically relevant with accounting digital assets, due to their volatility over short periods.
Under IFRS, companies must regularly check if their cryptocurrencies’ value has gone down.
- If the value has decreased: they need to compare their recorded value with the amount they could get in the market, minus the selling costs.
- If the recorded value is higher: they must adjust it down to reflect the real value.
- If the recoverable amount is less than the carrying amount, they must recognize an impairment loss in profit or loss for the difference.
Under US GAAP, using ASC 350, the cryptocurrencies reporting must take the form of intangible assets with indefinite lives. It involves two steps:
1. Compare the asset’s value to its market value.
2. If the asset’s value is higher, they must recognize an impairment loss.
3. Presentation and Disclosure:
IFRS mandates presentation of digital assets as a separate line item in the financial statement. Whereas, US GAAP does not provide specific guidance on presentation.
However, both frameworks emphasize the importance of disclosing significant accounting policies, judgments, and uncertainties surrounding cryptocurrencies.
Inventory Accounting Methods are similar.
Both IFRS and US GAAP support using the weighted average cost (WAC) and FIFO (First-In, First-Out) methods for inventory valuation.
The WAC approach ends up being calculation-intensive for companies dealing with a high volume of crypto activity. The FIFO approach can result in higher taxable income during periods of rising prices. Although, it is a simple method to calculate.
One of the challenges facing crypto asset accounting is knowing when to use the most advantageous accounting method to calculate one’s capital gains & losses.
→ Read more about Cryptocurrency Accounting in 2023: Compare WAC and Cost Basis.
The upcoming changes for US GAAP
A known challenge under the current US GAAP framework:
Companies often struggle to account for the constantly changing values of cryptocurrencies. This difficulty can result in potential problems related to impairment. Also affecting discrepancies between reported values and the cryptocurrencies’ real worth due to the cost-based model used.
With the new fair value approach, US GAAP will align better with IFRS standards:
It will increase consistency and comparability in financial reporting globally. This approach also brings added benefits for accounting teams:
- Timely and Accurate Reporting: Cryptocurrencies are measured at market value on the balance sheet date, enabling timely and accurate reporting of their current worth.
- Elimination of Impairment Testing: There’s no need for impairment testing, as immediate recognition of market value fluctuations are in the financial statements, providing a more accurate representation of economic value.
How to speed up a US GAAP transition:
Here are a few potential solutions to speed up the IFRS and US GAAP standard consolidation
- Industry Working Groups: Industry working groups comprising experts from both the accounting and cryptocurrency sectors could develop practical guidance on accounting for cryptocurrencies. These groups could work closely with standard-setting bodies to address the unique challenges posed by cryptocurrencies.
- Regular Updates: Given the dynamic nature of cryptocurrencies, accounting standards need to keep pace with industry developments. The FASB have recently updated the accounting guidance to report digital assets at fair market value, among other rules.
- Stronger Adoption of IFRS: Some countries, including many in Europe, have fully adopted IFRS as their national accounting standards. This approach eliminates the need for reconciling financial statements prepared under different frameworks. The United States has not fully adopted IFRS but allows foreign private issuers to use IFRS for their filings with the Securities and Exchange Commission (SEC).
While IFRS and US GAAP approach the accounting for cryptocurrencies in different ways, businesses can make efforts to harmonize these standards to ensure consistency and comparability in financial reporting.
It becomes even more essential for companies to stay up-to-date on changes in accounting standards and carefully consider the impact on their financial statements and strategic decisions. While this transition is ongoing, the impact will continue to shape the global digital asset accounting landscape.