The use of digital assets – or crypto-assets – is accelerating by the minute. But what exactly are they? And how can their ongoing accounting-related challenges be handled?
Let’s first take a look at what’s been happening here in Luxembourg. From January 2022, LuxSE has allowed certain security tokens (financial instruments issued on a distributed ledger) to be registered onto the Securities Official List. In November 2021, the CSSF published a first set of FAQs on virtual assets, addressing the fund industry and credit institutions. It clarified what kind of Luxembourg investment funds could invest in virtual assets, and what would be expected in terms of governance, risk management and ML/TF prevention.
What about accounting for those assets?
Despite the significant volume of cryptocurrencies and developments in other types of digital assets, their accounting treatment is an ongoing discussion. Given the constant changes that these assets face, it is highly unlikely to be fully finalized in the near future.
In April 2022, the European Financial Reporting Advisory Group (EFRAG) released its Recommendations and Feedback Statement summarizing the main comments received on its Discussion Paper “Accounting for Crypto-Assets (Liabilities)” (EFRAG Recommendations and Feedback Statement). Overall, it observed that the accounting practices for cryptocurrencies and related transactions was one of the highest priority topics for most respondents involved in discussions on standard-setting agenda – for the IASB as well as others including the FASB (EFRAG p.3).
The EFRAG has recommended that the IASB approaches the tasks by clarifying or amending existing standards (instead of issuing new ones), following a two-step approach:
Step 1:
Addressing the accounting requirements for crypto-asset holders. This might be done as part of the upcoming standard-setting project on intangible assets which, based on the limited guidance available so far, is one IFRS standard relevant in accounting for certain holdings of virtual assets. In April 2022, the IASB decided not to add cryptocurrencies and related transactions as a separate topic to its agenda, but indicated that these could be considered in the scheduled review of IAS 38. (IFRS – IASB Update April 2022). It further recommends developing disclosure requirements for issuers of crypto-assets, to help them better understand the rights and obligations in an ever-evolving market.
Step 2:
Recognition and measurement guidance for issuers of crypto-assets could be developed.
What do we know so far?
The IFRS Interpretation Committee has discussed how an IFRS issuer should account for holdings of certain types of cryptocurrencies (a subset of crypto-assets) using existing IFRS standards.
For that purpose, the Committee considers a subset of crypto-assets with all the following characteristics:
- a digital or virtual currency recorded on a distributed ledger that uses cryptography for security
- not issued by a jurisdictional authority or other party
- does not give rise to a contract between the holder and another party
The IFRS IC issued an agenda decision in June 2019 (PDF | 0.5MB) concluding that cryptocurrencies meeting the above-mentioned characteristics:
- are not cash as defined in IAS 32.AG3
- are not financial assets as defined in IAS 32.11
- meet the definition of an intangible asset and are therefore in the scope of IAS 38, or IAS 2 if held for sale in the ordinary course of business
Holdings of such cryptocurrencies should be accounted for under IAS 38 Intangible assets unless they are held for sale in the ordinary course of business, in which case IAS 2 Inventories would apply.
Measurement at fair value through profit and loss is normally not foreseen by these standards, for which cost accounting is the default approach (with some exceptions for commodity broker-traders under IAS 2). The EFRAG reported that this was considered unsuitable for crypto-assets and other intangibles held for trading or investment purposes by respondents, leading to a recommendation for the IASB to revisit IAS 38 Intangible assets.
Within current IFRS standards, special consideration is required on the disclosure requirements that would be relevant for holders of cryptocurrencies (e.g. from IAS 2, IAS 38 and IFRS 13, as applicable, as well as IAS 1.122 for significant judgements and IAS 10.21 for material non-adjusting events).
What’s more, the IFRIC highlighted that an entity is required to disclose any additional information that is relevant to its financial statements (IAS 1.112). In light of the variety and complexity of virtual assets, this general obligation for issuers to provide complete and sufficient information to make the financial statements reasonably understandable is a fundamental baseline.
What about other crypto-assets? And what do we need to keep track of?
IFRIC’s proposals deal only with certain types of cryptocurrencies, which again are only a subset of crypto-assets.
There is currently no specific IFRS accounting guidance on other types of assets. Considering their variety and ongoing developments, it is essential that we understand the implications for each specific case. The first step would be to understand the respective asset’s form and substance, and the rights and obligations that every asset bears.
In its April publication, the EFRAG highlighted that there might be some crypto-assets (e.g. security tokens, crypto-ETFs or stablecoins) that could have contractual features that would meet the definition of financial instruments and therefore be eligible for the financial asset classification (depending on facts and circumstances). Furthermore, the EFRAG considers there is a need to clarify whether and when fiat-currency-pegged stablecoins could be deemed to be cash equivalents under IAS 7. A full overview of aspects considered needing clarification as per EFRAGs research can be found in their publication.
Issuers should continue to monitor the standard-setter activities, as well as the guidance issued by regulators to ensure they appropriately account for the crypto-assets held under IFRS.
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This article has been written by Sotiraq Maze.
