Accounting & Reporting of Cryptocurrency under IFRS
Cryptocurrency is a type of digital currency that does not have a physical existence. In contrast to fiat currency, it was introduced as a means of exchange in the modern era. Because it is not backed by the government, it is decentralised and unsupervised by any regulatory authority. However, it is protected by powerful encryption using blockchain technology. Unlike traditional currencies, cryptocurrency’s value can fluctuate dramatically in a short period of time.
Given the nature of digital currency, there are a variety of accounting techniques that can be used. Cryptocurrencies can be considered as cash and cash equivalents because they constitute a means of exchange, but they did not meet the requirements of IAS 7 Statement of Cash Flows. They are not easily exchangeable for any products or services, which is contrary to IAS 7. Although some institutions have accepted digital money as a medium of exchange, there is no legal necessity to do so, and not all businesses accept it; in fact, stocking and trading cryptocurrencies is illegal in some jurisdictions.
Cash equivalents are monetary assets that can be converted into known amounts of cash with little risk of value changes over time. However, because they are so volatile, bitcoin is not a cash equivalent. Crypto does not appear to be a financial instrument because it does not reflect currency, an equity stake in a company, or a contract establishing a right or obligation to deliver or receive cash or another financial instrument. Continuing the topic of appropriate accounting treatment for these digital assets may pose issues because no accounting standard has been introduced specifically to address this accounting quandary. Taking into account IFRSs and the Conceptual Framework of reporting, it is preferable to account for cryptocurrencies in accordance with the entity’s needs in order to provide more relevant and honestly portrayed financial statements. What is the objective of a business keeping cryptocurrency? Is it for long-term investment, or short-term gain, or is the holding corporation a broker who deals in digital assets?
The Following accounting standards can be followed while reporting crypto assets in the financial statements under the IFRS.
Intangibles – IAS 38
Starting with the first scenario, where the corporation has made a long-term investment. According to IAS 38, an intangible asset is an identifiable and non-monetary item having no physical substance. Crypto satisfies the criterion since it may be bought or sold individually and is the result of a contractual or legal transaction.
According to IAS 38, intangibles having an indefinite life should be examined for impairment yearly and accounted for in accordance with IAS 36. Those assets that do not have a time limit on their ability to generate cash flows for the organisation. Because cryptocurrencies have no restrictions that limit their useful life, IAS 38 is the greatest fit. According to IAS 38, the indefinite useful life of assets should be assessed at each period to determine if events and conditions continue to support an indefinite useful life assessment. When an asset is sold, the gain or loss should be recorded in profit and loss.
Investments Properties – IAS 40
If the company in question is an investment firm, it is feasible that cryptocurrencies will be classified as an investment property. While recording profits and losses in profit and loss at the conclusion of each fiscal year.
Inventories under – IAS 2
In identifying business entities based on their intention to invest in crypto currency. A third form of business is a broker who buys and sells cryptocurrency on a regular basis, or any type of business whose core operations are related to cryptocurrency trading. According to IAS 2, inventories comprise assets held for sale in the ordinary course of business, and these types of enterprises can report bitcoins as inventory. As a result, cryptocurrency can be classified as inventory while recording at a lesser cost or NRV. This means that if the value of digital currency rises, it will not be recognised until it is sold, but if its net realisable value falls below its cost, it will be recorded immediately. The difference between the carrying value and the NRV will therefore be reported as a loss in profit and loss. This accounting technique will safeguard the corporation from fragile profits, but it will remain vulnerable to adverse fluctuation in cryptocurrency rates.
If the company’s investment in cryptocurrency is large, impairment losses on intangibles and a drop in inventory NRV could skew the company’s financial condition. As KPIs and critical financial ratios may shift unfavourably, conveying a worsening picture to key stakeholders. However, due to the volatile nature of cryptocurrencies, gains do not endure long and may prevent financial statement users from getting the genuine picture of the company’s financial status. Each accounting standard has its own disadvantage in terms of crypto; consequently, until new accounting standards are introduced, these accounting standards may be the best way for entities to account for cryptocurrencies.
Usman Rasheed & Co Chartered Accountants is a leading financial and corporate advisory firm in Pakistan, having offices in Islamabad, Quetta, Lahore, Karachi & Peshawar. The firm is providing Audit, Tax, Corporate, Financial, Legal & Secretarial Advisory services and other related assistance to local and foreign private, public and other organizations working in Pakistan