A step-by-step introduction to the key issues
Cryptocurrency is an intangible digital token which is recorded using a distributed ledger infrastructure, such as blockchain, and provides the owner with various rights of use. These digital tokens are owned by the entity which owns the key that allows the owner to create a new entry in the ledger. Essentially, they represent specific amounts of digital resources which the entity has the right to control and whose control can be reassigned to third parties.
There have been many suggestions on how cryptocurrency should be accounted for, but many of these would not be valid because they fail to meet the definition of certain aspects of accounting standards.
FRS 102 defines an ‘intangible asset’ as:
‘An identifiable non-monetary asset without physical substance. Such an asset is identifiable when:
Cryptocurrencies do appear to meet the definition of an intangible asset and hence FRS 102, section 18 Intangible Assets other than Goodwill will apply. The definition above confirms that an asset is separable if it is capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability.
Cryptocurrencies do not have a physical substance and hence the most appropriate classification is that of an intangible asset.
An entity can only recognise an intangible asset on the balance sheet when:
As cryptocurrency can be traded on an exchange, there is an expectation that the entity will receive an inflow of economic benefits. However, as is well-known, the value of cryptocurrencies can be significantly volatile and hence they are regarded as non-monetary for the purposes of financial reporting.
After initial recognition at cost, FRS 102, section 18 allows an intangible asset to be subsequently measured under the cost model or revaluation model.
Cost model
Under the cost model, cryptocurrency is measured at cost (including all directly attributable costs) less subsequent amortisation and impairment losses.
Revaluation model
Under the revaluation model, intangible assets are measured at a revalued amount provided there is an active market for them (which may not be the case for all cryptocurrencies). An ‘active market’ is defined as:
‘A market in which all the following conditions exist:
Where no active market exists for the cryptocurrency, they must be measured under the cost model.
Where an active market does exist for the cryptocurrency and the entity’s accounting policy is to measure them under the revaluation model, then that model must be applied to all cryptocurrencies in that asset class. While there is no specific timeframe as to the frequency of revaluations, FRS 102, para 18.18D states that revaluations must be made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the balance sheet date.
It is unusual for an intangible asset to have an active market. However, there may be an exception where cryptocurrencies are concerned because they are often traded on an exchange and hence it may be possible to apply the revaluation model to such assets.
Revaluation increases are recognised in other comprehensive income and accumulated in equity. This is because the revaluation model in FRS 102, section 18 applies the Alternative Accounting Rules in company law which require revaluation gains to be recognised in a revaluation reserve and presented in equity in the balance sheet. Revaluation gains can only be presented in profit or loss to the extent that the gain reverses a revaluation decrease of the same asset that was previously recognised in profit or loss.
Revaluation decreases are recognised in other comprehensive income (ie via the revaluation reserve) to the extent of a surplus in respect of that asset. Any excess revaluation decrease is recognised in profit or loss as debit balances on a revaluation reserve cannot arise.
Under FRS 102, intangible assets must be amortised on a systematic basis over the useful economic lives. If management are unable to assign a reliable useful economic life to a cryptocurrency, the maximum amortisation is ten years. It can be shorter, but not longer. We remind preparers that the ten year ‘cap’ on amortisation only applies in situations where management cannot reliably estimate the useful economic life. Where a longer life can be justified with supporting documentation, then that period should be used.
Depending on the entity’s business model, it may be appropriate to account for cryptocurrency under FRS 102, section 13 Inventories. This is because FRS 102, section 13 would apply to the stock of intangible assets. For clarity, FRS 102 defines ‘inventories’ as:
‘Assets:
Where an entity would hold cryptocurrencies for sale in the ordinary course of business, then it is treated as inventory and measured at the lower of cost and estimated selling price less costs to complete and sell. The inventory should also be reviewed at each reporting date to identify if there are indicators of impairment. Where there are indicators of impairment, the cryptocurrency must be written down to estimated selling price with the value of the impairment loss being recognised in profit or loss.
Information about judgements is required by FRS 102, para 8.6. Information about key sources of estimation uncertainty is required by FRS 102, para 8.7 and small entities applying the presentation and disclosure requirements of FRS 102, section 1A Small Entities are encouraged to provide such disclosures.
Cryptocurrencies bring with them a lot of judgement and uncertainty where recognition and measurement are concerned. To that end, FRS 102 would require management to disclose judgements that have been made concerning the accounting treatment for cryptocurrencies.
FRS 102, section 32 Events after the End of the Reporting Period requires disclosure of material non-adjusting events in the notes to the financial statements.
Given the fact that the value of cryptocurrency is significantly volatile, the entity would be required to disclose any material changes in fair value of cryptocurrency that take place between the reporting date and the date on which the financial statements are authorised for issue.
This would require management exercising professional judgement in determining whether any non-disclosure could influence the economic decisions that the users of the financial statements make on the basis of those financial statements.
Download ACCA's technical factsheet, Accounting for cryptocurrencies.