History has shown us that with growing times there is growing acceptance. A recent addition to that list has been crypto assets–asset-backed tokens, security tokens, Initial Coin offerings, stablecoin, cryptocurrency, utility tokens, NFTs, and everything else under the blockchain umbrella.
Despite the volatility and the price surges, the blockchain tech underlying crypto has become a disruptor in the financial sector and this cannot be undone. The only way forward for the governments is to bring it under their control as much as possible to avoid any unscrupulous activities that could fly under the radar.
While the Internal Revenue Service (IRS) of the US first acknowledged crypto way back in 2014, India is fairly new to the game. India introduced a tax on crypto assets (virtual digital assets) in the Union Budget in 2022. This shows that the governments are warming up and investors need to start treating their crypto assets as any other financial assets. This would mean keeping a track of the transactions they make and reporting them on their statements as of and when required.
What are the international accounting standards for cryptocurrency?
Cryptocurrency fits the bill under IAS 38-Intangible assets.
As per the definition, Intangible Assets are those without physical substance and are identifiable (separable or arising from contractual or legal rights).IAS 38 requires a business entity to recognize an asset as an intangible asset if it is probable that the future economic benefits that are attributable to the asset will flow to the entity, regardless of whether it is acquired externally or generated internally. The economic benefits need to be based on reasonable conditions that may exist over the life of the asset. The cost of the asset should also be measurable.
Cryptocurrency can be traded on exchanges and generate profits. They are also a form of digital money and do not have physical substance. Hence, they can be conveniently classified as intangible assets.
According to IAS 38, they can be measured either at cost or revaluation. In the cost model, the assets can be measured at cost on initial recognition and subsequently, at cost less accumulated amortization and impairment losses. In the revaluation model, the assets can be carried at a revalued amount if there is an active market for them.The revaluation model can be applied to cryptocurrencies since there is an active market for them in the form of exchanges. If the revaluation model is applied, IFRS 13 Fair Value Measurement should be used to determine the fair value of the crypto asset.
An entity also needs to determine if the asset’s useful life is finite or indefinite. Cryptocurrencies are considered as having indefinite useful life as there is no foreseeable limit to the period over which they can generate profits.
Depending on the entity’s business model, crypto-assets may also need to be accounted for under Inventories as per IAS 2. For example, if the business of the entity is to trade crypto, then as per IAS 2, the crypto assets should be valued at a fair value less cost to sell. However, if the business holds crypto for sale in the ordinary course of business, then the recognition of inventory is at a lower cost and net realizable value.
Accounting for cryptocurrencies is not easy or direct. Just like the nature of the asset, the accounting and reporting principles and rules will keep changing. Continuous reference must be made to the existing accounting standards.
Reporting and accounting for crypto assets as per US generally accepted accounting principles (GAAP)
As per the US Securities and Exchange Commission, Tesla has about $2 billion in bitcoin on its balance sheet. With about 43,200 bitcoins, Tesla has the second-highest holding of bitcoins. Despite such advancements and attention, US GAAP does not directly address the accounting and reporting for cryptocurrencies or crypto assets.
While crypto-assets are unlike other financial assets in many ways, they are ultimately still an asset. Hence, fundamental accounting principles apply.
As per ASC 350, cryptocurrencies can be accounted for as indefinite-lived intangible assets. According to the ASC master glossary, an intangible asset is “assets (not including financial assets) that lack physical substance. (The term intangible assets is used to refer to intangible assets other than goodwill.)”
Since crypto-assets lack physical substance, they should be classified as intangible assets and reporting entities should follow ASC 350 Intangibles – Goodwill and others unless the crypto falls under any other asset class.
ASC 350 also requires reporting entities to determine if the asset has a finite or indefinite life. The useful life is indefinite if there are no contractual, competitive, or other economic factors to limit its useful life to the reporting entity. Considering the underlying nature of crypto assets and blockchain, the assets are highly likely to have an indefinite useful life.
Since they are indefinite, instead of being amortized, they are tested for impairment annually. An indefinite intangible asset is considered impaired when its carrying amount is greater than its fair value.
Entities that are investment companies under ASC 946Financial services – investment companies, need to determine if the crypto assets they hold are debt securities, equity securities, or other investments. They should be measured at the purchase price (including transaction costs) and then adjusted to fair value each reporting period.
An entity that is a broker-dealer under ASC 940 Financial services – Brokers and Dealers should identify any commission income received from its customers as revenue.
If the entity is not an investment company under ASC 946, and it purchases a crypto asset using cash, then the cost of the crypto asset for the entity would be the value of the cash paid including transaction costs.
If the entity receives crypto in exchange for goods or services rendered in the normal course of business with customers, then the non-cash consideration guidance under ASC 606 Revenue from Contracts with Customers needs to be followed. But if it is obtained from a non-customer in exchange for non-financial assets, then ASC 610-20 Gains and Losses from the Derecognition of Nonfinancial Assets should be used to ascertain the initial measurement of the acquired crypto asset. Sales of crypto assets to non-customers should also be reported under ASC 610-20.
If crypto assets are received as part of an acquired business, they should be accounted for as per ASC 805 Business Combinations.
Reporting and accounting for crypto assets as per Indian GAAP
In India, crypto assets are not yet an approved medium of exchange for goods or services. Even though they are accepted by many entities, the acceptance is not wide and all-encompassing. The accounting standards in India also do not have guidelines for the crypto market. No Ind AS describes how crypto assets need to be measured or accounted for or be shown in financial statements.
As per Ind AS 32, which defines cash as “a financial asset because it represents the medium of exchange and is, therefore, the basis on which all transactions are measured and recognized in financial statements”, crypto-assets cannot be considered cash.
As per Ind AS 7, which 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”, they also cannot be considered cash equivalents since crypto are subject to changes in value because of their underlying highly volatile nature.
They are also not financial assets as neither do they give any contractual right to the holder to receive cash nor are they equity instruments of another entity.
According to Ind AS 38 “An intangible asset is an identifiable non-monetary asset without physical substance.”. According to Ind AS 21, “the essential feature of a non-monetary item is the absence of a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency.” So, as per Ind AS framework crypto-assets can be classified as intangible assets.
But, as per GAAP, intangible assets are only those that are used in the production and supply of goods or services, for rental to others, or for administrative purposes. If held for capital appreciation, or in exchange for acquiring goods and services, it should be considered as inventory and not as intangible assets.
If an entity has traded or invested in cryptocurrency during the financial year, then disclosures regarding the following are to be made
- Amount of cryptocurrency held at the reporting date
- Profit or loss on transactions involving cryptocurrency
- Deposits or advances from any person for the purpose of trading
Accounting and reporting crypto assets is not a simple and straightforward task, whether it is in the US or India. The lack of directives from regulatory bodies and the government makes the job tougher. It all comes down to the interpretation of the existing rules and standards. Even on the personal front, it is essential to report cryptocurrencies on tax returns.
It takes professional guidance, such as a CFO consultancy service, to recognize, measure, and disclose activities pertaining to the various types of crypto assets.