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How to treat cryptocurrencies in accounting 

29th Oct 2018
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Cryptocurrencies have existed for some years – but with the recent rise of their availability and use in payments, it’s time to consider how we should account for them. Anne Cowley ACA looks at the issue. 

Cash equivalents
Both FRS 102 and IAS 7 Statement of Cash Flows define cash equivalents as ‘short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value’. This won’t work for those cryptocurrencies with significant price fluctuation. 
Another issue is that cash represents the medium of exchange, and is the basis of all transactions in financial statements. It seems inappropriate to apply this to cryptocurrency.

Other financial assets
Another option is to treat cryptocurrencies as another type of financial asset, such as an investment. FRS 102 and IFRS define a financial investment as ‘a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another’.
The problem is that a financial asset needs to convey the contractual right to cash or another financial asset. Currently, cryptocurrencies do not meet this, as no contractual counterparty is obliged to repurchase them. Some ‘stable cryptocurrencies’ are on the way, pegged to fiat currency such as USD, which may meet the criteria – but until they launch, no cryptocurrencies meet the definition of financial assets. 

Inventories 
In some cases, cryptocurrencies may be classified as inventory – such as where cryptocurrency is held for sale as part of the entity’s ordinary activities, rather than for investment purposes.
The general rule with inventory is to hold it at the lower of cost or net realisable value. However, both standards offer scope-outs for commodity broker-traders, allowing inventory to be measured instead at fair value through profit or loss. 

Intangible assets
The final option is to class them as intangible assets. FRS 102 and IAS 38 Intangible Assets define intangible as ‘an identifiable non-monetary asset without physical substance’, which covers cryptocurrencies. 
Intangible assets are initially recognised at cost. Where cryptocurrencies are received as payment for goods or services, the asset would be recognised either at the fair value of the cryptocurrency, or the selling price of the good or service. 
Subsequent measurement is then either at cost less impairment, or at revaluation to fair value, though there must be an active market to apply the latter. The cryptocurrency would also need to be revalued regularly, ensuring the carrying value is not materially different to the fair value – a particular challenge for more volatile cryptocurrencies. Revaluation gains or losses must be taken through other comprehensive income (OCI), except where the value falls below cost. 
Another issue is assigning a useful economic life. Under IAS 38, which permits indefinite useful lives, this isn’t an issue, but FRS 102 would require amortisation charges – though you can allocate a very long life. 
Treatment as an intangible asset isn’t an ideal measurement basis for cryptocurrency – but at the current time, it’s most appropriate means of accounting for most common cryptocurrency types. 

For more expert guidance on cryptocurrencies and other accountancy issues, see Croner-i Financial Reporting. Visit www.croneri.co.uk or call 0800 231 5199 to book a demo.

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