Cryptocurrency by Costas Loizou

If you do a quick search on the internet on how many people have become “Bitcoin Millionaires” you will be inundated with stories of young individuals who invested their pennies some years ago and have now struck it rich. Currently there are over 100,000 accounts that hold US1,000,000 or more in Bitcoin.

The headway being made from the publicity, within the world of cryptocurrency has even caught the attention of many world-renowned corporations who have decided to dabble in the very lucrative but volatile digital currency.

From MicroStrategy investing in 105,085 Bitcoins to large brands such as eBay, Microsoft, PayPal accepting Bitcoin as a form of payment, cryptocurrency has come a long way from the days it was exchanged through the dark web with fear of the great unknown.
There are currently many different types of cryptocurrencies in existence (10,971 at the time in writing this article). The most popular, Bitcoin, was the first cryptocurrency to appear in January 2009. However, since then the marketing folks have gotten hold of this and we have even funkier names such as Ethereum, Ripple, Litecoin and even a couple of cryptos named after some dog breeds.
Many Companies are now holding large amounts of crypto for various reasons, (investment, hedging, and trading), thus forming a significant part of their financial statements and it is therefore important to have some guidance and uniform accounting on the accounting treatment.
So, what’s the accounting issue? As no accounting standard currently exists to explain how cryptocurrency should be accounted for, accountants have no alternative but to refer to existing accounting standards (for the time being).

Going by the name, many would think that Cryptocurrency should be accounted for as FIAT currency. Afterall it is a form is a form of digital money.

with the limitation of being unable to readily exchange the cryptocurrency for goods or services. Although an increasing number of entities are accepting digital currencies as payment, digital currencies are not yet widely accepted as a medium of exchange and do not represent legal tender, meaning that even though Companies may choose to accept digital currencies as a form of payment, there is no requirement to do so. IAS 7 defines cash equivalents as ‘short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Doge, as it is sometimes referred to, has risen a whopping 6,975% in value over the past year.

Some would naturally think that they have a place with the financial assets and should be accounted for as a financial asset at fair value through profit or loss (FVTPL) in accordance with IFRS 9. However, it does not seem to meet the definition of a financial instrument either because it does not represent cash, an equity interest in an entity, or a contract establishing a right or obligation to deliver or receive cash or another financial instrument. Cryptocurrency is not a debt security, nor an equity security (although a digital asset could be in the form of an equity security) because it does not represent an ownership interest in an entity. Therefore, it appears cryptocurrency should not be accounted for as a financial asset.

Well, today’s accounting rules would lead to accounting for Cryptocurrency either as an intangible asset or inventories. If Cryptocurrency is recognized as inventory, then it would need to be measured at cost. If these digital currencies are recognized as intangible assets, then the default position would also be to measure them at cost. There is the possibility that if the digital coins are accounted for as intangible assets, an entity might be able to justify that there is an active market, in which case they would be able to be measured at fair value. However, this is still troubling many accounting minds because movements in that fair value would be recognized through other comprehensive income and the gain would not be recycled through profit and loss when the digital coins are realized. Many accountants feel like the most appropriate to account for cryptocurrency would be at fair value with movements reflected in profit or loss as this would provide the most useful information to investors. However, existing accounting requirements do not seem to permit this.

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB), the two main rule-setting bodies for accounting standards worldwide. There have been many developments and discussions between these two standard setters, and such developments emphasize the ongoing relevance of establishing accounting requirements for the current and next generation of crypto assets. The European Reporting Advisory Group’s (EFRAG) discussion paper sets out the following possible options for developing IFRS requirements addressing crypto-assets and liabilities:

Option 1 – No amendments to current IFRS standards: Preparers would continue to apply existing IFRS, including having to develop their own accounting policy (IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors).

Option 2 – Amendments and/or clarifications to current IFRS standards: Several amendments or clarification guidance would be made to current IFRS Standards for the accounting by holders and issuers of crypto-assets and liabilities.

Option 3 – Development of a new IFRS standard to address crypto-assets and liabilities: A new stand-alone IFRS Standard for crypto-assets and liabilities would be developed on the premise that they are unique.

As cryptocurrencies continue to evolve and are used more widely, there is continued debate around the importance of an accounting and regulatory framework that is fit for purpose and many of us are still in the dark with what the proposed outcome will be.

K. Treppides & Co Ltd is the largest independent consulting company in Cyprus with an established international presence and offices in Great Britain and Malta. Today the company employs approximately 200 professionals. It offers a full range of consulting, tax, audit, accounting services to groups, companies and investors operating internationally in a variety of financial and business sectors. The Company, which started its operations in 1985, has 35 years of expertise and an elite team of experienced executives who can guide and assist investors and businesses during the establishment process and subsequent investment activity in Cyprus and internationally.