AccountingCryptocurrencyAccounting For Cryptocurrency In 2023: An Ultimate Guide

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With the increase in the company’s participation and investments in Cryptocurrency assets, accounting for cryptocurrency in 2022 has become a huge topic. While cryptocurrency commenced in 2009, it has been booming in the past few years. Regardless of whether you own an Estonia cryptocurrency license, Malta VFA license or Singapore payment institution license, all regulated jurisdictions will definitely require your business to do accounting for cryptocurrency in order to stay compliant. There are no specific accounting standards that specifically govern and address cryptographic assets. However, Tetra Consultants has summarised the commonly adopted accounting practices below based on International Financial Reporting Standards (IFRS) from a holder perspective and issuer perspective.

A cryptocurrency asset holder means a company that purchased the cryptocurrencies to store value or to make an investment return. The Holder does not participate in any form of cryptocurrency mining activity. Hence the objective is only to hold and gain investment return.

A cryptocurrency asset issuer means a company that invested in all that hardware, software, and all its-resources with the main objective of serving the market and focus on creating a new cryptocurrency. You could refer to Coinbase (a cryptocurrency exchange) to check out well-known cryptocurrencies such as bitcoin, Ethereum.

Cryptocurrency basics

What is Cryptocurrency from an accounting perspective? Cryptocurrencies are defined as those digital or virtual currency recorded on a distributed ledger that uses cryptography for security. Cryptocurrency is a currency that is not issued by any government authorities or parties hence it does not give rise to a contract between the holder and issuer.

Cash and Cash equivalents

Can you account for and present cryptocurrency as cash and cash equivalent? As cryptocurrency does not meet the definition of legal tender and is also not supported or recognized by a government authority. Generally, any form of cryptocurrency does not qualify as Cash and Cash Equivalent. Hence, companies should not account for it as cash and cash equivalents. Irrespective of whether you are an issuer or holder of Cryptocurrency, you should not account for it as cash and cash equivalent. You could refer to IFRS 32 and IFRS 7 financial instruments for further detailed definitions of Cash and Cash equivalent.

Financial Asset at Fair Value through Profit or Loss (FVTPL)

As per IFRS 9 financial instrument, an asset has to meet the definition of financial instrument to be accounted for as financial assets. General definition from IFRS 9: A financial instrument has to either represent cash or equity interest in an entity, it has to establish a right or obligation to deliver or receive cash or another financial instrument. Based on the above definition, we could safely conclude that cryptocurrencies do not fit the definition. As discussed above, a cryptocurrency does not qualify as a legal tender hence there is no legal obligation between transacting parties. As such, a company cannot account for Cryptocurrency as a financial asset at fair value through profit or loss (FVPTL).

Intangible Assets

An intangible asset is defined as an identifiable non-monetary asset without a physical substance. IFRS 38 also clearly states that an asset is identifiable if it is separable or arises from contractual or other legal rights. IFRS also states that if an asset is identifiable separable if it is capable of being separated or divided from the entity and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, identifiable asset, or liability. IFRS 21, also states that an essential feature of a non-monetary asset is the absence of a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency.

Based on all the above criteria stipulated by IFRS, it is reasonable to conclude that cryptocurrencies meet the definition of Intangible assets. An entity could or is capable of separating the cryptocurrencies from the holder and selling or transfer individually, hence it also does not provide the holder a right to receive a fixed or determinable number of units of currency in exchange.

In addition to the above, a cryptocurrency can be traded on an exchange and there is an expectation that the holder will receive an inflow of economic benefits. Cryptocurrency is also subject to significant fluctuations of value as it does not have a physical substance and it is non-monetary.

Cost Model or Revaluation Model for Accounting for Cryptocurrency in 2022

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As per IFRS 38 Intangible assets, a Company may measure its intangible assets using the cost model or revaluation model. If a company opts for the Cost Model, the intangible assets should be measured at cost on initial recognition and thereafter subsequently measured at cost less accumulated amortization and impairment losses.

Accounting Entries for Cost model:

Initial Entry

  • Dr. Cost of Intangible Assets (Statement of Financial Position)
  • Cr Cash or Bank (Statement of Financial Position)

Subsequent Entries

If there is a decline in the cryptocurrency value

  • Dr. Impairment of Intangible Asset (Statement Of Profit and Loss)
  • Cr Accumulated Impairment (Statement of Financial Position)

The common complication for using the cost accounting approach is that you will not be able to recognize the increase in the fair value of your cryptocurrency when the value increases above the cost.

If a company opts of the revaluation model, the intangible assets should be measured at cost on initial recognition and thereafter subsequently measured fair value.

Accounting Entries for Revaluation Model:

Initial Entry

  • Dr. Cost of Intangible Assets (Statement of Financial Position)
  • Cr Cash or Bank (Statement of Financial Position)

Subsequent Entries

If there is a decline in the cryptocurrency value

  • Dr. Impairment of Intangible Asset (Statement of Profit and Loss)
  • Cr Accumulated Impairment (Statement of Financial Position)

If there is an increase in the cryptocurrency value

  • Dr. Revaluation Surplus (Statement of Financial Position)
  • Cr. Other Comprehensive Income (Statement of Profit or Loss)

The above entries are in line with IFRS 38 intangible assets which clearly states that an increase in revaluation should be recognized in other comprehensive income and accumulated equity. It also requires the revaluation increase to be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset that was previously recognized in profit or loss.

IFRS 38 intangible asset also requires an entity to record its revaluation loss in profit or loss. However, the decrease shall be recognized in other comprehensive income to the extent of any credit balance in the revaluation surplus in respect of that asset.

A company can only opt for the revaluation model if there is an active market for cryptocurrency. As such it might not be practical to use this model for all types of cryptocurrency. IFRS 38 intangible asset also requires an entity to measure all assets in a particular asset class using the same measurement model. Hence if the company has a class of assets that has no active market, then it has to measure all the assets within the same class using the cost model. To determine whether the cryptocurrency has an active market, a company could look at whether the cryptocurrencies are being traded on any exchange. If it is then the company might be possible to apply the revaluation model.

In addition to the above active market testing, an entity will also require to assess the useful life of the cryptocurrency. (i.e finite or indefinite). Indefinite useful life essentially means that there is no foreseeable cap to the period over which the asset is expected to generate positive cash inflow to the holder. Based on the above, you could justify that cryptocurrencies could be considered as an asset with an indefinite life. Hence a cryptocurrency asset with an indefinite life is not amortized but tested for impairment annually.

Inventory

An entity depending on the principal activity and the intentions of management could in specific situations account for cryptocurrencies in accordance with IFRS 2 Inventory. Mainly because IFRS 2 defines an inventory of intangible assets as an Inventory and an asset. To qualify for this recognition an entity might have to meet the held for sale criteria. If the entity holds the cryptocurrency assets for sale in the ordinary course of business or rendering of services then it could treat the cryptocurrency asset as inventory.

However, if the entity acts as a broker-trader of cryptocurrencies, then IFRS 2 requires the company to value the inventory at fair value with few selling costs. The primary purpose of holding such assets is for the purpose of selling them in short term and profiting from the price fluctuations of these assets commonly referred to as trader margin. Hence such recognition could be only recognized in specific circumstances.

Accounting entries for held for sale inventory

  • Dr. Inventory
  • Cr. Cash/Bank

Subsequently, inventories should be valued at lower of cost and net realizable value.

Broker/Traders of Cryptocurrency

  • Dr. Inventory
  • Cr. Cash/Bank

Subsequently, inventories should be valued at fair value less costs to sell.

Engage Tetra Consultants for Accounting for Cryptocurrency in 2022

The above information was based on information available and market updates as of the date of writing. As there is a lot of estimations and judgments and disclosures requirements involved in accounting for cryptocurrency. If you are a business entity participating in cryptocurrency assets, Tetra Consultants recommends you speak to our designated in-house cryptocurrency accounting team. Our team of chartered accountants consists of ex auditors who are well versed in the international financial reporting standards whom will be able to resolve your Cryptocurrency accounting.

Contact us to find out more about our accounting services for cryptocurrency in 2022. Our team of experts will revert within the next 24 hours.

Technically International Accounting Standard (IAS) and International Financial Reporting Standard (IFRS) are both identical. The key difference between the two is that IAS represents old accounting standards, such as IAS 17 Leases. While, IFRS represents a new accounting standard, such as IFRS 16 Leases. Tetra Consultants prefers IFRS over IAS.

Tetra Consultants

Tetra Consultants is the consulting firm that works as your advisor and trusted partner in your business expansion. We tell our clients what they need to know, instead of what they want to hear. Most importantly, we are known for being a one-stop solution for our valued clients. Contact us now at enquiry@tetraconsultants.com for a non-obligatory free consultation. Our team of experts will be in touch with you within the next 24 hours.

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