Reporting the financial performance of a range of entities (C10)

 Accounting for Cryptocurrencies

1. Introduction: The Challenge of Accounting for Cryptocurrencies

• Issue: Cryptocurrencies lack a specific IFRS Accounting Standard, necessitating reference to existing standards.
• Exam Tip: Candidates should reflect on the scenario, identify potential IFRS Standards, and justify their application or non-application.
• Example: In an exam, a candidate might assess IAS 7, IAS 32, and IFRS 9 before concluding IAS 38 is most appropriate.

---

2. What is Cryptocurrency?

• Definition: Cryptocurrencies are intangible digital tokens recorded on a blockchain, representing various rights.
• Key Characteristics:
  • Owned via private keys.
  • Can be traded or transferred.
  • Represent control over digital resources.

---

3. Applicability of IFRS Standards

IAS 7: Statement of Cash Flows

• Cryptocurrencies are not cash or cash equivalents:
  • Not legal tender.
  • Limited acceptance as a medium of exchange.
  • Subject to significant price volatility.
• Example: Bitcoin cannot be classified as cash because most retailers do not accept it universally.

IAS 32 and IFRS 9: Financial Instruments

• Cryptocurrencies do not qualify as financial assets:
  • Not equity interests or contractual rights to receive/deliver cash.
• Example: A company holding Bitcoin cannot classify it as a financial instrument because it lacks debt or equity characteristics.

IAS 38: Intangible Assets

• Cryptocurrencies meet the definition of intangible assets:
  • Non-monetary, without physical substance.
  • Identifiable through separability and control rights.
  • Example: Ethereum, traded on an exchange, can be classified as an intangible asset as it can be separated and sold individually.

---

4. Measurement under IAS 38

• Models:
  • Cost Model: Measured at cost less accumulated amortization and impairment losses.
  • Revaluation Model: Requires an active market, allowing for valuation adjustments.
• Fair Value:
  • IFRS 13 governs fair value measurement in active markets.
  • Example: Bitcoin, actively traded daily, can use the revaluation model based on quoted prices.

---

5. Special Circumstances: IAS 2 Inventories

• Cryptocurrencies may qualify as inventory:
  • For Sale: Held for sale in the ordinary course of business.
  • Broker-Traders: Entities holding cryptocurrencies for profit from price fluctuations can measure them at fair value less costs to sell.
• Example:
  • A retail company holding Bitcoin as a payment alternative: Inventory under cost model.
  • A cryptocurrency exchange: Inventory under fair value less costs to sell.

---

6. Disclosure Requirements

• Judgments and Assumptions:
  • IAS 1: Significant judgments about classification and measurement of cryptocurrencies.
  • IAS 10: Disclosure of post-reporting period events affecting fair value.
• Example: If Bitcoin’s value drops significantly after the reporting date, disclosure is required to inform users of potential risks.

---

7. Practical Application and Exam Strategy

• Approach:
  • Evaluate the scenario against multiple IFRS Standards.
  • Conclude based on the most applicable standard and justify.
  • Incorporate management judgment and disclosures.
• Example: For an entity using cryptocurrencies for long-term investment, classify under IAS 38 and test for impairment annually.

---

Conclusion

• Cryptocurrencies are most commonly classified as intangible assets under IAS 38 due to their non-monetary, digital nature.
• In specific cases, IAS 2 may apply for broker-trader inventories.
• Disclosure under IAS 1 and IAS 10 is critical due to inherent judgment and volatility.
• Exam Tip: Demonstrate a structured thought process, referencing standards and providing justified conclusions.

Assurance Report:

https://www.duplichecker.com/