What are cryptocurrencies and how do we account for them? – Technology
While we wait for the current review of FRS 102, we need to exercise judgment and find the best possible accounting fit for cryptocurrencies, as they are not specifically represented in FRS 102 at this time.
So what exactly is cryptocurrency and how do we account for it?
Is it cash?
No. Although we may consider cryptocurrencies to be cash, they are not legal tender and do not meet the FRS 102 definition of:
Highly liquid cash and sight deposits and short-term investments which are readily convertible into known amounts of cash and which are subject to negligible risk of change in value.
Is it a financial instrument?
No. In some cases, cryptocurrencies can be accepted in exchange for goods, but as we have seen above, they are not cash and they do not qualify for cash either. This would result in a failure of the FRS 102 reference for financial instruments:
A contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
Is it an inventory?
May be. The inventory includes items that are held for later sale, so depending on how the company plans to use the cryptocurrency, it could fall within this range. For example, if the business needs to frequently buy and sell cryptocurrencies in order for it to trade cryptocurrencies as part of the normal course of business, inventory would be the correct classification.
If so, the cryptocurrency would be held at the lowest of:
- Cost (the value of the money initially exchanged for the cryptocurrency); and
- estimated selling price (the value at which it will be sold, which is likely to be based on current market prices) less costs to complete and sell.
The presentation would then be in the current assets section of the balance sheet as inventory. The balance sheet note on stocks in the financial statements would then indicate the distribution of stocks which would include the cryptocurrency.
What if I don’t trade cryptocurrency?
If inventory is not the correct classification due to the way the company uses cryptocurrency, classification as an intangible asset is probably the best solution.
This is due to the FRS 102 definition of an intangible asset which is:
An identifiable non-monetary asset without physical substance. Such an asset is identifiable when:
(a) it is separable, or
(b) it arises from contractual or other legal rights.
Cryptocurrency would meet the definition above because it is not physically present and it is separable from the business because it can be sold in exchange or, in some cases, be used in exchange for goods.
The basis of measurement of cryptocurrency when it is held as an intangible asset is either:
- the cost (again being the value of the money initially exchanged for the cryptocurrency), with amortization and depreciation applied; Where
- revaluation, corresponding to the fair value less depreciation and impairment.
Before deciding which one is the most appropriate, it is advisable to refer to section 18.18 of FRS 102, which allows revaluation of intangible assets only if the fair value can be determined from an active market, which:
- contains homogeneous elements,
- has willing buyers at all times; and
- prices available to the public.
This is possible for some cryptocurrencies, but not necessarily all.
There are also two options for the presentation of the balance sheet.
- Option 1 is to hold the intangible asset as a fixed asset; and
- Option 2 is to hold the intangible as a capital investment.
Both are equally acceptable under company law, the decision should be made based on how the company intends to use the cryptocurrency in the future.
A clear accounting policy will be required for each cryptocurrency classification decided upon. The accounting policy should clearly state:
All other information should comply with Section 13 of FRS 102, Inventories or Section 18 Intangible Assets, as applicable. Additional information should also be provided to ensure that a true picture is given.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.