The popularity of cryptocurrencies has soared in recent years, yet they do not fit easily within IFRS’ financial reporting structure. For example, an approach of accounting for holdings of cryptocurrencies at fair value through profit or loss may seem intuitive but is incompatible with the requirements of IFRS in most circumstances. This Viewpoint explores the acceptable methods of accounting for holdings in cryptocurrencies while touching upon other issues that may be encountered.
IAS 38 ‘Intangible Assets’
For reasons explained in this Viewpoint, our view is that in the majority of cases, it will be appropriate to account for them in accordance with IAS 38 ‘Intangible Assets’ either at cost or at revaluation. Use of the revaluation method depends on there being an active market for the cryptocurrency in concern.
In limited circumstances, it may be appropriate for an entity to account for cryptocurrency assets in accordance with the guidance set out in IAS 2 ‘Inventories’ for commodity broker-traders. IAS 2’s default measurement approach is to recognise inventories at the lower of cost and net realisable value. However, the Standard states that commodity broker-traders are instead required to measure their inventories at fair value less costs to sell, with changes in fair value less costs to sell being recognised in profit or loss in the period of the change. Our view is that this will only be appropriate in narrow circumstances where cryptocurrency assets are acquired by the reporting entity with the purpose of selling them in the near future and generating a profit from fluctuations in price or broker-traders’ margin.
IASB - finding a solution
We are aware that accounting for cryptocurrency assets under IAS 38 is neither very satisfying nor intuitive. Accounting for the assets at cost may have little resemblance to their worth, while the mechanics of the revaluation method with its requirements to recognise gains and losses in profit and loss in some circumstances and in other comprehensive income in others, are complicated. We would therefore encourage the IASB to undertake a project addressing the accounting for these assets.
Other issues to be aware of
- Currency translation - cryptocurrencies will need to be translated into an entity’s functional currency in accordance with the requirements of IAS 21 ‘The Effects of Changes in Foreign Exchange Rates’. In terms of initial recognition, this means that a cryptocurrency holding will be recorded using the spot exchange rate between the functional currency and the cryptocurrency at that date.
Disclosure - entities holding cryptocurrency assets will need to comply with the disclosure requirements of either IAS 2 or IAS 38 as appropriate. Given that cryptocurrencies do not fit easily within the IFRS framework, entities may need to consider additional disclosures in order to comply with the overall objective in IAS 1 ‘Presentation of Financial Statements’ which is to provide useful information to the users of the financial statements.
Mining issues - cryptocurrency mining describes the process in which transactions for various forms of cryptocurrency are verified and added to the blockchain digital ledger. A number of additional issues arise for entities that are ‘mining’ cryptocurrencies. Cryptocurrency ‘miners’ use large amounts of computing power to solve blockchain algorithms. Once a block has been solved by the miner they may, depending on the mining algorithm, be entitled to ‘transaction fees’ as consideration for verifying cryptocurrency transactions and entering them in the blockchain ledger.
Applying IFRSs in challenging situations
Our ‘IFRS Viewpoint’ series provides insights from our global IFRS team on applying IFRSs in challenging situations. Each edition focuses on an area where the Standards have proved difficult to apply or lack guidance. A future IFRS Viewpoint will explore other more complex issues, such as those relating specifically to cryptocurrency miners.