Cryptocurrencies and blockchain technology have revolutionised accounting practices, offering transparency and security in financial transactions. However, the unique nature of cryptocurrencies presents challenges for accountants. In this article, we will explore the accounting considerations and guidance for professionals and Strategic Business Reporting (SBR) candidates when dealing with cryptocurrencies.
Cryptocurrencies are digital tokens recorded on a decentralised ledger called a blockchain. They serve various purposes, such as acting as a medium of exchange or representing ownership interests in assets or services. Ownership of cryptocurrencies is established through cryptographic keys, allowing individuals to create and control ledger entries. Unlike traditional assets, cryptocurrencies are not physically stored but exist as digital resources accessible through blockchain technology. It is important to note that there are no universal laws or common understanding of the standard to be used for cryptocurrencies. Therefore, the accounting treatment of cryptocurrencies is based on the different nature of their holdings and requires consideration of existing accounting standards.
Accounting for cyptocurrencies
When it comes to categorising cryptocurrencies for accounting purposes, there is no universally accepted standard. Let’s explore some possible classifications:
- Cash or financial assets:
Cryptocurrencies do not fit within the definitions of cash, cash equivalents, or financial instruments according to IFRS (International Financial Reporting Standards).
- Property, plant, and equipment:
Cryptocurrencies are intangible assets and do not fall under the scope of IAS 16, which governs tangible assets.
If an entity holds cryptocurrencies for sale in its regular business operations, they may be considered as inventory under IAS 2. This is applicable when the entity actively trades cryptocurrencies, intending to profit from price fluctuations or traders’ margins. In such cases, cryptocurrencies are measured at cost, and gains or losses are recognised in the profit and loss statement.
- Intangible asset:
When cryptocurrencies do not meet the criteria for other classifications, they are likely to be treated as intangible assets under IAS 38. Cryptocurrencies fulfill the characteristics of an intangible asset as they are controlled by the entity, distinguishable, lack physical presence, and generate economic benefits. Gains or losses from trading cryptocurrencies as intangible assets are subject to capital gains or losses rules.
Given the complexity and uncertainty surrounding cryptocurrency accounting, disclosure becomes crucial. IAS 1 mandates the disclosure of significant management judgments related to cryptocurrency holdings, as these judgments can impact financial statement figures. Additionally, IAS 10 requires the disclosure of material non-adjusting events, including post-reporting period changes in cryptocurrency fair values that could influence economic decision-making based on the financial statements.
Accounting for cryptocurrencies is a complex task that requires referencing existing accounting standards due to the absence of specific IFRS guidelines. Aspiring professionals and SBR candidates should familiarise themselves with the accounting treatment outlined in this article to align with examination expectations and industry standards. The continued growth of cryptocurrencies necessitates a nuanced understanding of their accounting implications, ensuring transparency and accuracy in financial reporting in the modern era.
Navigating cryptocurrency accounting requires a comprehensive understanding of the unique challenges posed by these digital assets. As regulations and standards continue to evolve in this dynamic field, seeking expert guidance becomes crucial. At Regency Partners, we are well-versed in cryptocurrency accounting practices and can provide the necessary assistance and expertise to ensure accurate financial reporting. For more information on our services and how we can help you effectively manage your cryptocurrency accounting needs, contact us today.