Crypto-currencies: accounting for IAS / IFRS purposes

The Interpretation Committee (IC) has recently answered the request of IASB, regarding the accounting treatment to be applied to crypto-currencies.

Crypto-currencies are digital currencies that can be used for the payment of goods and services or held for the purpose of investment. Unlike traditional currencies, crypto-currencies have no legal tender and are not guaranteed by a central bank or a government agency. Furthermore, the circulation of crypto-currencies is not regulated by a central bank.

It is possible to state that cryptocurrencies meet the definition of “asset” contained in the IFRS Conceptual Framework. However, the next step is to understand what kind of asset we are talking about.

Crypto-currencies could initially be considered a financial asset (cash) due to the fact that they can be used to buy goods and services. Since crypto-currencies are not issued and / or guaranteed by any government agency or State, they do not meet the definition of “fund” contained in IAS 7 – Statement of cash flow, which requires the fund is composed of cash on hand and sight deposits. In fact, the one who holds crypto-currencies does not have the possibility of requesting money in exchange but can make his investment either by selling to another subject or by using it to buy goods and services.

The IC has stressed that crypto-currencies do not meet the definition of a “financial asset” as required by IAS 32, because:

  1. they do not constitute a liquidity asset
  2. they are not an equity instrument of another entity
  3. they do not constitute a contractual right to receive cash or another financial asset from another entity or to exchange financial assets or financial liabilities with another entity under conditions potentially favorable to the entity.

Moreover, due to their volatility, crypto-currencies do not even satisfy the definition of “cash equivalents“: “highly liquid short-term investments, which are ready to be converted into a known amount and which are subject to insignificant risks of change in value”.

According to IC, crypto-currencies are included in the definition of “intangible assets” required by IAS 38, according to which an intangible asset is an identifiable non-monetary asset without physical substance. The accounting standard establishes that an asset is identifiable if:

  1. it is separable, it can be separated from the entity;
  2. derives from contractual rights or other legal rights, regardless of whether these rights are transferable or separable from the entity or from other bond rights.

Once determined the nature of intangible assets, the treatment in the financial statements will depend on the owner’s investment strategy: if destined for sale in the normal course of business, the rules it will apply come from IAS 2; alternatively it will apply the regulation of intangible fixed assets coming from IAS 38.

IAS 2 provides for the initial registration at cost and subsequently crypto-currencies must be valued at the lower of cost and net realizable value. However, when a broker trader – whose activity consists in the sale for speculative purposes – holds crypto-currencies, he evaluates its inventories at fair value net the selling costs, with recognition of changes in value into an income statement.

IAS 38 requires that an intangible asset is recognized initially at cost and subsequently for its measurement based on a choice between the cost model and the revaluation model. The revaluation model assumes that intangible assets, whose fair value is determined in a market, have the characteristics to be called “active”. If the revaluation model is adopted, it must be considered that the changes in fair value must be recorded in the comprehensive income statement.

In conclusion, methods of accounting for crypto-currencies are not yet covered by accounting standards and the application of the current IAS / IFRS provisions is often not evident. In the future, the Standard Setters and the supervisory authorities will issue specific guidelines, considering the evolution of the reference scenery.