Accounting for Cryptocurrencies

12.10.2021
Samuel Grimmer
Audit and Accountancy, Tax

Whether they confuse, scare, or excite you, most people have heard about cryptocurrencies in recent years. Elon Musk has been tweeting about them, El Salvador has officially adopted Bitcoin as legal tender, and corporates are beginning to accept and hold various cryptocurrencies. As there is wider adoption, more businesses will end up acquiring these digital assets which raises the question on how to account for them.

Currently there is no specific reference to cryptocurrencies within IFRS (International Financial Reporting Standards) or UK GAAP (Generally Accepted Accounting Practice – FRS102 (The Financial Reporting Standard applicable in the UK and Republic of Ireland) being the principal standard in the UK), however the ICAEW (Institute of Chartered Accounts in England and Wales) did release a technical note suggesting potential accounting treatments which are covered within this article. Therefore it is still an emerging accounting area and the treatment may develop further in the future as standard setters lay out their requirements. 

Based purely upon their name, you would think  cryptocurrencies should be accounted for as cash and cash equivalents. However, under FRS102 they fall short of the cash and cash equivalents definition because they are highly volatile, have low liquidity to fiat currency (government backed currencies such as GBP or USD), and still only a small proportion of outlets accept them. 

Similarly, you may think having ruled out cash, cryptocurrencies should be treated as being financial instruments. However, a financial instrument is a contract that gives rise to a financial asset in one entity and a financial liability or equity in another. Although it is often possible to convert a cryptocurrency to fiat currency through an exchange, there is no right to do so, nor is there a liability or equity recognised in another entity. 

Under FRS102 this just leaves inventory and intangible assets as possible accounting contenders.

Inventories are defined as assets held for sale in the ordinary course of business and are accounted for at the lower of cost and net realisable value. Unless that is the main trading activity of the entity, which is unlikely for most, then it would not be a suitable accounting treatment. The only remaining option therefore is intangible assets. 

Under FRS102, intangible assets are identifiable non-monetary assets without physical substance. Cryptocurrencies meet this definition because they are identifiable and saleable on crypto exchanges while not having a physical being. There is a choice in accounting treatment being the cost model (carried at historical cost less any amortisation and any accumulated impairment) or the revaluation model (carried at fair value) – although to use the revaluation model there must be an active market for the asset, which may not necessarily be the case depending on the cryptocurrency. 

Therefore currently we would generally expect to see cryptocurrencies accounted for as intangible assets. 

Nobody knows what the future holds for cryptocurrencies, but at the time of writing, cryptocurrencies have a market cap in excess of $2 trillion and a daily trading volume of over $100 billion – therefore we can expect to see Bitcoin and other cryptocurrencies being reported more commonly on the balance sheets of businesses.

Note: the above analysis is an overview of the accounting considerations of general cryptocurrencies, and does not in any way constitute investment advice – we recommend that you seek specialist advice before entering into any investment. There are thousands of different crypto assets and they should be considered on an individual basis taking account of the purpose and utility of the relevant crypto, and the business model and intention of the acquiring business. Different scenarios of acquiring crypto such as through mining or via an Initial Coin Offering (ICO) may also carry different accounting treatments. Similarly derivative products linked to cryptocurrencies are likely to be accounted for differently. We recommend that you seek professional advice tailored to the scenario before making an accounting decision on cryptocurrency.

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