• Stephan Lego-Deiber, Partner |

Not too long ago, the hype around digital currencies exploded, with bitcoin being the flagship cryptocurrency in popular conversation. Everyone raved about the new payment instrument which would swiftly conquer the financial world. Even if all that has cooled off somewhat now, digital currencies have not gone anywhere—indeed, they are spreading, with 100,000+ retailers worldwide accepting them.

Early this year, Japanese bitcoin exchange Bitflyer received its payment institution licence from the CSSF, becoming the European hub for the international trading of the cryptocurrency. In Luxembourg, Bitflyer is second in size only to Bitstamp, which is another major exchange.

With this rise, accountants are asking—and being asked—what bookkeeping for digital currencies should look like. It’s an excellent question, and one relevant not just to accountants but also to investors interested in finding cryptocurrency information in financial statements.

The possible accounting futures of digital currency

In current discussions about how to treat digital currency under the International Financial Reporting Standards (IFRS), four views have emerged as to where it should fall under:

  • IAS 7 Cash or Cash Equivalent
  • IFRS 9 Financial Instruments
  • IAS 38 Intangible Assets
  • IAS 2 Inventory

Neither the International Accounting Standards Board (IASB) nor the Financial Accounting Standards Board (FASB) has taken a position on this or offered guidance, meaning that there are several interpretations. The Australian Accounting Standards Board (AASB) is one of the first to make its position known, back in December 2016, addressing the lack of IFRS guidance.

After discussing the requirements for the above-mentioned financial asset categories, the AASB concluded that accounting standards do not really fit the needs of cryptocurrencies. It said that digital currencies meet the definition of IAS 38 and IAS 2 at some level, but stipulated that both standards’ treatments are ultimately unsuitable because their measurement methods would not result in relevant information for financial statement issuers.

If digital currencies do not meet the definition of any financial asset, current accounting rules would conclude that cryptocurrencies can be considered to be intangible assets under IAS 38, inventories under IAS 2, or as commodity broker-trader transactions exempt from IAS 2. Accounting-wise, therefore, they are to be shown at cost by default. As a result, gains and losses as well as any changes in the value of these instruments would in general not touch profit and loss accounts.

In Luxembourg, local authorities are currently debating the issue. Aside from an article on the possibilities mentioned above published in March 2018, the Commission des normes comptables (CNC) has not taken a position.

In summary

Some have called digital currencies a craze, dismissing the fervour as hype.

Seemingly in defiance of such thinking, both the European Securities and Markets Authority (ESMA) and the Commission de Surveillance de Secteur Financier (CSSF) have published warnings recently on the substantial risks that cryptocurrencies and initial coin offerings (ICOs)—having no legal framework—bring. The CSSF makes particular note that its warning is not about the technology itself but about the risks for investors. The regulator supports the creation of a legal framework either on a European or international level.

China and Korea, as well as some European banks (e.g. Nordea Bank), have forbidden trading with such instruments. But there is reasonable evidence that the trend, for the time being, is also expanding in the other direction, with retailers hopping aboard and Japan’s recent decision to make bitcoin a legal payment method (which was made over a year ago).

In such a context, accounting guidance is seriously needed. The FASB has considered adding the topic to its agenda, the AASB has engaged with it, and the US Securities and Exchange Commission (SEC) has generated interest too: all initial coin offerings or token sales in the US must be registered with the SEC, which requires the filing of audited financial statements—and that presumes the availability of accounting guidance.

It now falls to the FASB and the IASB to put cryptocurrencies on their dockets and to materially advance the conversation.