Cryptocurrencies and Non-Fungible Tokens (NFTs) have come under the spotlight a lot more lately, and here is what we know about them. What does this mean for the accounting world and how are they treated?
How Do You Perform Accounting for Cryptocurrencies and NFTs?
What You Need to Know About Cryptocurrencies
Cryptographic assets have recently sparked a lot of interest due to their rapid increases in value and volatility. This includes some of the common cryptocurrencies you might have come across like Bitcoin. Since interest in cryptographic assets has been growing exponentially, so too has the regulatory scrutiny in a number of jurisdictions.
What Is A Cryptographic Asset?
Cryptographic assets are digital representations that can be transferred. While they can be transferred, they cannot be copied or duplicated. A ‘blockchain’ or distributed ledger technology is the technology that facilitates the transfer of cryptographic assets.
Blockchain is a ledger that is digital and decentralised, and records all transactions that occur across a peer-to-peer network and allows for information encryption. Cryptocurrencies are used as a form of payment for goods or services, as well as for the transfer of funds.
So far, the accounting standards make no mention of cryptoassets. Choosing the most appropriate accounting standard for cryptoasset accounting may necessitate significant judgment.
What Is the IAS and IAS 38?
In June 2019, the IFRS Interpretations Committee (IFRS IC or the Committee) published an agenda. The agenda held the decision on how an IFRS reporter should apply existing IFRS standards to its holdings of cryptocurrencies, a subset of crypto assets, in response to a request from the International Accounting Standards Board (IASB or the Board).
The Committee determined that a cryptocurrency holding meets the definition of an intangible asset under IAS 38 Intangible Assets. This was because it can be separated from the holder and sold or transferred individually, and it is not a monetary asset. For example, it does not give the holder the right to receive a fixed or determinable number of units of currency.
A holding of cryptocurrency may be accounted for as inventory under IAS 2 Inventories or as an intangible asset under IAS 38 Intangible Assets. This would depend on whether the cryptocurrency is held for sale in the ordinary course of business.
In other words, cryptocurrency holders cannot account for cryptocurrencies using IFRS 9 Financial Instruments or IAS 8 Accounting Policies, Changes in Accounting Estimates, and Errors anymore.
Is A Cryptocurrency Considered A Financial Asset?
In short, no it is not. A cryptocurrency holding is not a financial asset because it does not meet the definition of a “financial asset” as defined in paragraph 11 of IAS 32 Financial Instruments: Presentation.
There is no IFRS that directly indicates whether ownership of an item of cryptographic resource should be included in the asset’s report for the benefit of others. Such entities should consider the general guidance of IAS 8, “Accounting Policy, Changes in Accounting Estimates and Accounting Errors” when developing accounting policies for such assets.