Executive Summary : Cryptocurrency, an intangible digital token recorded using a distributed ledger infrastructure, called as blockchain primarily on first instance seems to be cash and Cash Equivalents, however after careful consideration of all principles of Ind AS, it should be classified as Intangible Asset. It should be valued at Cost upon Initial measurement. Subsequently, it should be either valued at Cost less impairment loss or revalued using Fair Value model.
Accounting for Crypto Currencies
Cryptocurrencies are transferable digital assets that are designed in a way that prohibits its duplication. These are mainly used as means of exchange and share features with traditional currencies. The market for cryptocurrencies are evolving fast. The most common cryptocurrency used currently is bitcoin.
What is Cryptocurrency ?
Cryptocurrency is an intangible digital token recorded using a distributed ledger infrastructure, called as blockchain. These tokens provide various rights of use and designed as a medium of exchange. Other digital tokens provide rights to the use other assets or services or can represent ownership interests often termed as Initial Coin Offerings. These tokens 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 the token. These tokens are not stored on an entity’s IT system as the entity only stores the keys to the Blockchain (as opposed to the token itself). They represent specific amounts of digital resources which the entity has the right to control, and whose control can be reassigned to third parties.
Applicable IND AS/AS
At present there is no IND AS or AS prescribed for accounting for cryptocurrencies.
Whether it’s a cash or cash equivalent?
On a first instance, it comes to our mind that it should be accounted for as cash and cash equivalents. Crypto currency cannot be termed as cash as they are not widely accepted medium of exchange as they are not legal tender. Further, the same cannot be termed as Cash equivalents as they are not subject to ‘ an insignificant risk of change in value’ due to significant price volatility which they are subject to. Thus, cryptocurrencies cannot be termed as cash and cash equivalents and cannot be accounted for in accordance with Ind AS 7.
Whether it’s a Financial Asset?
It may appear that it is a financial asset and can be accounted for at fair value through profit and loss account as per Ind AS 109. However, it also didn’t meet the definition of financial instrument as it does not represent cash, an equity interest in any entity and also do not give contractual right to receive cash or other financial instruments. It is neither a debt security nor an equity security as it does not represent an ownership interest in any entity. Thus, it cannot be termed as a financial asset as per Ind AS 109.
Whether it’s a Property, Plant and Equipment?
As Crypto currency do not have any physical substance, it can not be accounted for as tangible Assets.
Whether it’s a Intangible Asset ?
Crypto currency most closely meet the definition of Intangible Assets as –
- they are identifiable assets as they are capable to be separated from the holder and can be transferred individually
- they are non-monetary as they do not result in fixed or determinable amount of currency
- they do not have physical substance
Thus, it appears that cryptocurrency meets the definition of an intangible asset. Cryptocurrency can be traded in an exchange resulting in flow of economic benefit to the entity.
Whether it’s an Inventory ?
For commodity broker traders, it can be argued that the same is inventory as these are assets held for sale in the ordinary course of business. This type of inventory is principally acquired with the purpose of selling in the near future and generating a profit from fluctuations in price or broker-traders’ margin. Thus, fair value less costs to sell method would be appropriate where the business model is to sell cryptocurrency in the near future with the purpose of generating a profit from fluctuations in price.
Measurement Criteria :
Thus, following position emerges w.r.t. Cryptocurrency :
- Initial Measurement : At Cost
- Subsequent Measurement : Either
√ At Cost less accumulated amortisation and impairment loss (although they are likely to have indefinite useful life and thus cannot be amortised but must tested for impairment) or
√ At Revalued amount (if there is active market for the crypto)
The same measurement criteria is to be used for all assets in a particular asset class. In case of upward revaluation, increase is to be accounted for in Other Comprehensive income and recognised in equity. However, an upward increase can be recognised in profit and loss account to the extent it reverses the earlier revaluation decrease of same assets which was recognised in profit and loss account. Based on estimates and judgement involved, adequate disclosures are required to be made.
In case, revaluation model is to be applied, Fair Value can be measured as per provisions of Ind AS 113 by referring to the active market. The quoted price in the active market provides most reliable evidence of fair value.
Conclusion :
The IFRS Interpretations Committee issued an agenda discussion on cryptocurrencies in June 2019 wherein Cryptocurrency was defined as a digital or virtual currency recorded on a distributed ledger that uses cryptography for security. These are not issued by a jurisdictional authority or other party and does not give rise to a contract between the holder and another party.
The Committee concluded that Cryptocurrency should be accounted for as an intangible asset for the justifications cited above. The Committee also concluded that holding of Cryptocurrency that is held for sale in the ordinary course of business should be accounted for as per Ind AS 2.
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