Cryptocurrency is an intangible digital token that is recorded across numerous distributed individual ledgers in an online infrastructure. The information relating to every transaction secured by strong cryptography (as it derived it name as “crypto currencies”) is stored over distributed nodes and linked together block by block in a chain, often referred to as a blockchain. While the rest of the information of the transaction is stored over online, the owner holds and stores only the key that enables he to access the ledger to create a new entry or re-assign the ownership of the token. Apart from the strong encryption technology embedded in each transaction, the distributed structure of the blockchain creates an identical image copy of the transaction held online by all the participating ledger holders. While each transaction uses individual users to verify transactions, each verified transaction must be checked and approved by the majority of ledger holders. Therefore, it is virtually impossible for any hackers to be able to hack through and modify majority of each and every transaction stored by individual ledger holders.
Having this basic understanding of cryptocurrency, we then ask ourselves what is this creature and how should we account for this in the financial statement ?
With the current popularity and hype on digital currency eg bitcoins, it might seems that cryptocurrency should be accounted for as cash. IAS 7 defines cash equivalents as ‘short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value’. Thus, cryptocurrency cannot be classified as cash as it is not readily be exchange for cash and its value is subject to significant price volatility.
However, cryptocurrency does appear to meet the definition of an intangible asset in accordance with IAS 38, Intangible Assets which defines an intangible asset as an identifiable non-monetary asset without physical substance.
Interestingly, there is no present formal consensus on the legal or commonly accepted definition for “crypto-assets” and “crypto-liabilities”.
In its discussion paper in December 2020 proposing accounting requirements for crypto-assets and liabilities, the European Financial Reporting Advisory Group (EFRAG) put forth the following possible options for developing IFRS requirements addressing crypto-assets and liabilities:
Option 1 – No amendments to current IFRS standards: Preparers would continue to apply existing IFRS, including having to develop their own accounting policy (IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors).
Option 2 – Amendments and/or clarifications to current IFRS standards: Several amendments or clarification guidances would be made to current IFRS Standards for the accounting by holders and issuers of crypto-assets and liabilities.
Option 3 – Development of a new IFRS standard to address crypto-assets and liabilities: A new stand-alone IFRS Standard for crypto-assets and liabilities would be developed on the premise that they are unique.
With the standard-setters continue to debate and reach a consensus on the treatment of cryptocurrency, it will remain in no man’s land, in the hands of its stakeholders in such time until its fate is sealed.