Accounting of Crypto Currencies

Understanding the Crypto Currency

Cryptocurrency is decentralized digital money, based on blockchain technology. These currencies are owned by an entity that owns the key that lets it create a new entry in the ledger. Access to the ledger allows the re-assignment of the ownership of that currency. Cryptocurrencies are such product of the digital age that operate without involvement of banks, governments, or any middleman. You will need to use a digital currency exchange to buy and sell cryptocurrencies. Cryptocurrency got its name because it uses encryption to verify transactions. This means advanced coding is involved in storing and transmitting cryptocurrency data between wallets and to public ledgers. The aim of the encryption is to provide security and safety.

Accounting Dilemma

As on today, no Accounting Standard (AS) / Ind AS prescribes how crypto currencies should be recognized, measured, presented in Financial Statements. Hence, the only option available with us is to refer the existing standards to deal accounting of crypto currencies. In article, we have shared our views on how crypto currencies should be accounted in books in the context of Indian Economy.

What it can be ?

Each and every probable option can be checked as follows:

1 ) Technical Reference of Standard

2 ) Evaluation

Cryptocurrencies as Cash and Cash Equivalent

• Technical Reference of Standard:

Para AG3 of Ind AS 32:

“Currency (cash) is 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.”

Para 6 of Ind AS 7 / Para 5.2 of AS 3:

“Cash equivalents are 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.”

• Evaluation:

In India, till now, cryptocurrencies are not used as an approved medium of exchange for any goods or services. There are entities in India who accepts payment in cryptocurrencies. However, it is not widely accepted as a medium of exchange since it doesn’t represent the legal tender and hence cryptocurrencies can’t be considered as cash.

Further, as we all know cryptocurrencies are subject to significant price volatility, because of which it doesn’t fit into the definition of cash equivalent as well.

Cryptocurrencies as Financial Assets / Investments

• Technical Reference of Standard:

Para 11 of Ind AS 32:

“A financial asset is any asset that is:

(a) cash;

(b) an equity instrument of another entity;

(c) a contractual right:

(i) to receive cash or another financial asset from another entity; or

(ii) to exchange financial assets or financial liabilities with another entity under conditions that are potentially favorable to the entity; or

(d) a contract that will or may be settled in the entity’s own equity instruments”

Para 3.1 of AS 13:

“Investments are assets held by an enterprise for earning income by way of dividends, interest, and rentals, for capital appreciation, or for other benefits to the investing enterprise. Assets held as stock-in-trade are not investments.”

Para 5 of AS 13:

“Some investments have no physical existence and are represented merely by certificates or similar documents (e.g., shares) while others exist in a physical form (e.g., buildings).”

• Evaluation:

Under Ind AS Framework, as discussed above cryptocurrency is neither cash nor it is an equity instrument of another entity. Further, cryptocurrencies don’t give any contractual right to the holder to receive cash or any other financial assets in exchange of cryptocurrency. Moreover, it is not a contract that will be settled in entity’s own equity instruments. Considering all these factors, holding of cryptocurrencies cannot be considered as financial assets.

Under IGAAP Framework, Definition of Investments under AS 13 covers assets held by an entity for capital appreciation. Further, AS 13 covers investments which have no physical existence. Cryptocurrencies are digital assets having no physical substance and the same can be traded on various exchange to fetch economic benefits in terms of capital appreciation. Considering these aspects, cryptocurrencies can be accounted as an Investments under IGAAP Framework.

Cryptocurrencies as Property, Plant and Equipment

• Technical Reference of Standard:

Para 6 of Ind AS 16 / Para 6 of AS 10:

“Property, plant and equipment are tangible items that:

(a) are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes; and

(b) are expected to be used during more than one period”

• Evaluation:

Since property, plant and equipment covers only tangible items, cryptocurrencies, being digital items, cannot be accounted as Property, Plant and Equipment.

Cryptocurrencies as Investment Property

• Technical Reference of Standard:

Para 5 of Ind AS 41:

“Investment property is property (land or a building—or part of a building—or both) held (by the owner or by the lessee as a right of-use asset) to earn rentals or for capital appreciation or both.”

Para 3.4 of AS 13:

“An investment property is an investment in land or buildings that are not intended to be occupied substantially for use by, or in the operations of, the investing enterprise.”

• Evaluation:

Since Investment properties cover only land, building or part thereof, cryptocurrencies cannot be accounted as Investment Properties.

Cryptocurrencies as Inventory

• Technical Reference of Standard:

Para 6 of Ind AS 2 / Para 3.1 of AS 2:

“Inventories are assets:

(a) held for sale in the ordinary course of business;

(b) in the process of production for such sale; or

(c) in the form of materials or supplies to be consumed in the production process or in the rendering of services.”

• Evaluation:

When an entity is holding cryptocurrencies for sale in ordinary course of business, it can be considered as Inventory since standard also applies to Inventory of intangible assets.

Cryptocurrencies as Intangible Assets

• Technical Reference of Standard:

Para 8 of Ind AS 38:

“An intangible asset is an identifiable non-monetary asset without physical substance.”

Para 16 of 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.”

Para 6.1 of AS 26:

“An intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the production or supply of goods or services, for rental to others, or for administrative purposes”

Para 7 of AS 11:

“Monetary items are money held and assets and liabilities to be received or paid in fixed or determinable amounts of money. Non-monetary items are assets and liabilities other than monetary items.”

• Evaluation:

Under Ind AS Framework, cryptocurrencies are considered as identifiable digital assets which do not have any physical substance. Cryptocurrencies are also capable of being separated and sold / transferred or exchanged individually. Cryptocurrencies can be traded on an exchange and therefore can fetch economic benefits. Further, in the absence of a right to receive a fixed or determinable number of units of currency, it can also be considered as non-monetary asset. Accordingly, cryptocurrencies can be classified as Intangible assets under Ind AS Framework.

Under IGAAP Framework, AS 26 covers only those intangible assets which are held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. The purpose of holding cryptocurrencies can either be for capital appreciation or to exchange it for acquiring any goods or services. In such case it should be either considered as Investment or Inventory but not an Intangible Asset under IGAAP Framework.

Subsequent Measurement

Cryptocurrency Recognized as	Under Ind AS Framework	Under IGAAP Framework
Investments	Not Applicable	If investments are classified as current, it shall be carried at lower of cost and fair value in the balance sheet. In respect of investments for which an active market exists, market value generally provides the best evidence of fair value. If investments are classified as long term, they are usually carried at cost. However, when there is a decline, other than temporary, in the value of a long-term investment, the carrying amount is reduced to recognize the decline. (Refer Para 14 and 17 of AS 13)
Inventory	Inventories shall be measured at the lower of cost and net realizable value. (Refer Para 9 of Ind AS 2) Brokers / traders who deal in cryptocurrencies shall measure their inventories at fair value less costs to sell. (Refer Para 3(b) of Ind AS 2)	Inventories should be valued at the lower of cost and net realizable value. (Refer Para 5 of AS 2)
Intangible Assets (Having Active Market)	As per Ind AS 38, Intangible assets having active market shall be measured using revaluation model. Under revaluation model, intangible assets shall be carried at fair value less accumulated amortization and impairment. Fair value shall be measured with reference to an active market as per guidance provided in Ind AS 113. (Generally due to existence of active market, it will fall in Level I hierarchy.) If an intangible asset’s carrying amount is increased as a result of a revaluation, the increase shall be recognized in OCI and accumulated in equity as revaluation surplus. However, the increase shall be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss. If an intangible asset’s carrying amount is decreased as a result of a revaluation, the decrease shall be recognized in profit or loss. However, the decrease shall be recognized in OCI to the extent of any credit balance in the revaluation surplus in respect of that asset. (Para 75, 85 and 86 of Ind AS 38)	Not Applicable

Disclosures

All relevant disclosures which are applicable to respective class of assets i.e. Inventory or Investments / Intangibles are required to be made in financial statements based on the actual classification made by an entity.

Further, due to amendment in Schedule III to the Companies Act, 2013, w.e.f. April 1, 2021 following additional disclosures are also required to be made in financial statements where Company has traded or invested in Crypto currency or Virtual Currency during the financial year:

(a) profit or loss on transactions involving Crypto currency or Virtual Currency

(b) amount of currency held as at the reporting date,

(c) deposits or advances from any person for the purpose of trading or investing in Crypto Currency / virtual currency.

Conclusion

In absence of any specific guidance from regulatory bodies, the accounting of cryptocurrencies is highly subjective and mainly depends upon the business model which an entity adopts. In June 2019, the IFRS Interpretation Committee published its agenda decision on ‘Holdings of Cryptocurrencies’, where they concluded that IAS 2, ‘Inventories’, applies to such assets where they are held for sale in the ordinary course of business and in other cases, an entity applies IAS 38, ‘Intangible Assets’, to holdings of cryptocurrencies. However, the and markets are developing continuously which requires

 in depth analysis of various relevant factors before determining any accounting treatment.