Cryptocurrency : The Accounting Scene

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Why is Accounting Important?

A prospective investor or shareholder of the company is not involved in the day to day workings of the company and hence will not aware of how the company is performing.
It is very tedious to expect such person to go through the daily accounting transactions for a period as the transactions may run to hundreds or thousands in number.
To overcome this difficulty, a summary of transactions for a period are presented in statements and reports to assist such persons to make an informed decision regarding the company.

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The Financial Results of a Company is always based on its Financial Statements for the period, normally a Financial Year. The Financial Statements of a Company comprises of inter alia the Statement of Financial Position and Statement of Comprehensive Income.
The Statement of Financial Position is a statement that portrays the Assets and Liabilities of the Company as on the Reporting Date, while the Statement of Comprehensive Income portrays the amount of Income and Expenses accrued during the Reporting Period.

How is Cryptocurrency presented and disclosed?

Any transaction incurred in business can normally be categorised into :

  1. Income - receipts by the company ;
  2. Expense - spendings or payments made by company ;
  3. Assets - the tangibles and intangibles owned by the company ;
  4. Liabilities - the amounts owed by the company to others ;

It can be clearly observed that if a company purchases cryptocurrency it would account the spendings incurred for the purchase as an Expense and the units of cryptocurrency purchased as an Asset.

Upon establishing the basic nature of the purchased cryptocurrency as an Asset, the company would have to further confirm the sub categories of assets to present and disclose the same.

Presentation under Assets.

To maintain uniformity, consistency and to establish the possibility of comparison, Accounting Bodies across the globe have formulated Accounting Standards and Guidelines to assist companies in the presentation and disclosure of accounting transactions. They specify how companies must maintain and report their accounts, defining types of transactions, and other events with financial impact.

In June 2019, the International Financial Reporting Standards Interpretation Committee (IFRS IC) published its agenda decision on ‘Holdings of Cryptocurrencies’, and it considered a subset of cryptographic assets with the following characteristics:

  • a digital or virtual currency recorded on a distributed ledger that uses cryptography for security;
  • not issued by a jurisdictional authority or other party; and
  • does not give rise to a contract between the holder and another party.

The IFRS IC concluded that IAS 2, ‘Inventories’, applies to such assets where they are held for sale in the ordinary course of business. If IAS 2 is not applicable, an entity applies IAS 38, ‘Intangible Assets’, to holdings of cryptocurrencies.

Hence, cryptocurrency would be considered to be an inventory when held for sale and as an intangible asset when held for capital appreciation purposes.

The IFRS IC in such publication clarified that cryptocurrency would not be categorised as Cash as IAS 32 implies that cash is expected to be used as a medium of exchange (ie used in exchange for goods or services) and as the monetary unit in pricing goods or services to such an extent that it would be the basis on which all transactions are measured and recognised in financial statements.

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Some cryptocurrencies can be used in exchange for particular good or services. However, the Committee noted that it is not aware of any cryptocurrency (at the time of the publication) that is used as a medium of exchange and as the monetary unit in pricing goods or services to such an extent that it would be the basis on which all transactions are measured and recognised in financial statements. Consequently, the Committee concluded that a holding of cryptocurrency is not cash because cryptocurrencies do not currently have the characteristics of cash.

Source : “Holding of Cryptocurrency” IFRS IC June 2019

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