Accounting for cryptocurrencies

In March 2019, an IFRIC agenda decision was published to confirm the accounting treatment of cryptocurrencies applying the current IFRS framework. Based on the nature and characteristics of cryptocurrencies, the IFRIC agenda decision concluded that they do not meet the respective IFRS definitions of cash, cash equivalents or financial instruments.

However, it was confirmed that cryptocurrencies may meet the definition of either an intangible asset or inventory, depending on the circumstances. The different measurement bases that apply to intangible assets and inventory are discussed further below.

Similarly, the Financial Accounting Standards Board (FASB) issued a tentative decision in October 2022 that confirms that under US GAAP, crypto assets that meet a pre-defined scope should be classified as intangible assets and measured at fair value, regardless of the intention of the holder.

Furthermore, the December 2022 tentative decision confirmed that under US GAAP the movement in fair value should be presented in net income, and provided specific disclosure requirements applicable to crypto-assets.

Under IFRS, where an entity holds cryptocurrencies for sale in the ordinary course of business, the cryptocurrencies are considered to be inventory and should be accounted for in terms of IAS 2 Inventories. Inventories are typically measured at the lower of cost and net realisable value.

As an exception, broker-traders would be permitted to measure their inventories at fair value less costs to sell. Broker-traders are those who buy or sell commodities for others or on their own account. A broker-trader of cryptocurrencies would generally acquire the cryptocurrencies with the intention of selling them in the near future and generating a profit from fluctuations in prices or broker-traders’ margin.

The below sets out the measurement, presentation and disclosure considerations under IFRS of cryptocurrencies that are not held for sale in the ordinary course of business and would therefore be classified as intangible assets under IAS 38 Intangible Assets. The determinant factor in selecting the measurement base is whether an ‘active market’ exists. An active market is a market in which transactions for the cryptocurrency take place with sufficient frequency and volume to provide pricing information on an ongoing basis.

The emergence of cryptocurrencies raises novel accounting questions, many of which are just starting to be examined. Given the diverse range of cryptocurrencies, the first step in the accounting analysis is to understand the characteristics as well as the rights and obligations relating to the respective holdings.

Due to the limited accounting guidance in this area and the dynamic and evolving nature of the industry, cryptocurrency holders should monitor financial reporting developments.

Please contact our team below should you have any questions on accounting for cryptocurrencies or other digital assets.