31 Aug
Cryptocurrencies are not actually currency
At a first glance, some may expect cryptocurrencies to be accounted for as cash, however, strictly speaking, cryptocurrencies do not fit the mold when it comes to the definition of cash.
The Committee observed that the description of cash in paragraph AG3 of IAS 32 implies that cash is expected to be used as a medium of exchange (i.e. used in exchange for goods or services) and as the monetary unit in pricing goods or services to such an extent that it would be the basis on which all transactions are measured and recognised in financial statements.
IFRS June 2019
Although cryptocurrencies can be used in exchange for good or services, IFRIC concluded that a holding of cryptocurrency is not equivalent to cash as defined in IAS 7 and IAS 32 because cryptocurrency cannot readily be exchanged for any good or service.
Crypto accounting
Crypto accounting refers to the financial reporting requirements around cryptocurrencies. Till-date, crypto specific accounting standards are yet to be defined in IFRS or GAAP to provide guidance on how cryptocurrencies should be accounted for, accountants therefore have to rely on existing accounting standards.
As mainstream adoption of cryptocurrencies continues to grow at the institutional level, we can expect new guidance for crypto accounting as we recently saw with FASB in the US deciding to allow companies to use “fair value” to account for their crypto holdings.
How to account for cryptocurrencies
Most cryptocurrencies meet the IFRS and GAAP’s definition of intangible assets, and are therefore accounted as such.
The Committee concluded that IAS 2 Inventories applies to cryptocurrencies when they are held for sale in the ordinary course of business. If IAS 2 is not applicable, an entity applies IAS 38 Intangible Assets to holdings of cryptocurrencies.
IFRIC June 2019
An intangible asset is an identifiable non-monetary asset without physical substance. Intangible assets are initially measured at cost and are subsequently measured at cost less accumulated amortisation and impairment losses.
An extremely simplified example
Purchasing cryptocurrency
Recognise the asset on your balance sheet at its fair market value on the date of purchase.
| GL Account | Debit (Dr) | Credit (Cr) |
|---|---|---|
| Cash | $100 | |
| Crypto Asset | $100 |
Selling cryptocurrency
Debit cash based on the amount received. Credit the asset to remove it from your balance sheet at its book value. The difference is the gain which will be represented in the income statement.
Gain
| GL Account | Debit | Credit |
|---|---|---|
| Cash | $150 | |
| Crypto Asset | $100 | |
| Gain | $50 |
Opposite to gain, loss occurs when the cryptocurrency is sold for less than the book value.
Loss
| GL Account | Debit | Credit |
|---|---|---|
| Cash | $50 | |
| Crypto Asset | $100 | |
| Loss | $50 |
Cash will increase while cryptocurrency is removed from the balance sheet. However, the cash received is smaller than the original book cost of the cryptocurrency, so we need to represent the loss as the balancing figure between cash and cryptocurrency, this will be represented in the income statement.
Glossary
- Blockchain: A decentralised ledger of all transactions made on a peer-to-peer network
- CBDC: Central Bank Digital Currency
- Cryptocurrency: A digital currency that is verified and recorded on a distributed ledger
- FASB: Financial Accounting Standards Board
- GAAP: Generally Accepted Accounting Principles
- IAS: International Accounting Standards
- IFRIC: IFRS Interpretations Committee
- IFRS: International Financial Reporting Standards
- Intangible Asset: An identifiable non-monetary asset without physical substance
P.S. This post is limited to cryptocurrencies, other crypto-assets (including tokens), CBDCs and stable-coins etc. are beyond the scope of this post, as their account depends on their purpose, and therefore can differ from the above.
Need some assistance?
We can assist in automating the reconciliation of your digital assets & transactions from DeFi protocols, wallets, exchanges, and institutional custodians into your ERP or Bookkeeping software.
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2 Comments
Hans Down
Very informative
Lance Bogrol
Nice post