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Digital Assets: Accounting for Crypto Currencies

 frederick Glover |
Education & Learning

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With the growing popularity of cryptocurrencies and total value of locked value locked up standing at around 7billion as at the time of writing this post according to Defipulse, accounting for them has been arbitrary till IFRIC's guide, with some considering it as an intangible asset, financial instruments others inventories and others cash and cash equivalents. This new cryptocurrency or digital asset has a lot of technicalities that needs to be explained to easen the minds of many accountants and scholars. but what really is the stance proposed by International accounting standard body?.

Quick Overview
  • What are digital assets
  • what are cryptocurrencies
  • Accounting for cryptocurrencies
  • Conclusion

What are digital assets

Digital assets are intangible assets that can be created, traded, transferred or stored in a digital format, in reference to blockchain technology, Digital assets comprise of cryptocurrencies and tokens that are used on the blockchain to either execute transaction or create a transaction or store a transaction state. These make use of cryptographic encryption to eliminate duplication and fraud.

What are cryptocurrencies

Crypto currencies are native digital assets of a blockchain network that allow them to be stored, traded and used as a medium of exchange. Crypto currencies make use of cryptographic hashes and timestamp to encrypt their transactions. This makes the currencies immutable and impossible to duplicate. Some notable cryptocurrencies are Bitcoin, Bitcoin cash, Ethereum, Ripple, Stella, Cardano, Neo and Litecoin.

What are tokens

Tokens are digital assets that exist on the blockchain, however, they are not native to their blockchain, but they are built on top of other blockchain network. Most digital tokens are built on top of the Ethereum network. This gives them some characteristics of the native currencies and other programmable states. The most common standard used for building tokens is the ERC-20, that allows tokens to be interoperable and ability to participate in DeFi applications.

Tokens may be classified as:
1. Asset-backed token: They derive their value from other assets or commodities like Gold, Oil or an underlying asset
2. Utility token: These tokens provide users with access to products or service, and they derive their value from that right. They provide no ownership interest in a company.
3. Security tokens: These tokens can provide a stake in an entity, or a right to receive cash or cash equivalents or another financial asset, or rights to vote in company decisions and residual interest in an entity.

Accounting for cryptocurrencies

Until recently, there was literally nothing official related to accounting for holding of cryptocurrency.
However, IFRS (International Financial Reporting Standards) Interpretations Committee (IFRIC) met in June 2019 and discussed guidelines for users. In accordance with their decision, cryptocurrency meets the definition of intangible asset in line with the standard IAS 38 Intangible Assets.

'Cryptocurrency is an asset for sure, because asset is a resource controlled by an entity as a result of past event from which future economic benefits are expected to flow to the entity – that is fully met.'

Under IAS 38, An Intangible asset is an identifiable non-monetary asset without physical substance. From the above, An Intangible asset should be the following criterion:

1.Identifiable: For an Intangible asset to be identifiable, it should be separable thus capable of being separated or divided and sold, transferred, licensed, rented or exchanged individually or collectively with a related contract, asset or liability.
2.Control: Having control is the power to obtain future economic benefits flowing from the underlying resource and restrict access to others.
3.Future economic benefits: Expectation of future economic benefit flowing to the entity through sale, cost savings or other benefits resulting from the use of the asset.
Recognition and measurement: Recognition when measurement when the cost of the asset can be reliably measured.

Reasons for holding Cryptocurrency

Cryptocurrencies may be held for the following major reasons:
#1. Cryptocurrency held for trading
If you are holding cryptocurrencies for sale in the ordinary course of business, you might need to apply IAS 2- Inventories.
Brokers and traders of cryptocurrencies or others who use it in their ordinary course of business should apply IAS 2 and measure their inventories at fair value less cost to sell.

#2. Cryptocurrency not held for trading
Where an entity desires to hold crypto currencies for capital appreciation or store of value, the recommended IAS 38-Intangible Assets should be applied and choose either the Cost model or Revaluation model.

Using the cost model –Cryptocurrencies are held at cost less accumulated amortization or impairment losses if any. Using the cost model, if there is any capital appreciation, you can not recognize the increase using the cost model. Only an impairment can be recognized.
Journal entry for Initial Recognition
Debit Intangible Asset
Credit Bank/Cash

Journal entry for impairment -subsequent
Debit Impairment loss (expense)
Credit Intangible Asset

Using the revaluation model – Here, an entity can use the active market rates of popular exchanges like Binance, Coinbase to revalue cryptocurrencies and account for any increases directly in other comprehensive income, or for decreases in profit or loss. This model takes into account effect of capital appreciation.

Intangible assets with indefinite useful life shall not be amortized. Annual impairment will however be done.
Journal entry for Initial Recognition
Debit Intangible Asset
Credit Bank/Cash

Journal entry for Upward revaluation -subsequent
Debit Intangible Asset
Credit Revaluation Surplus

Journal entry for impairment -subsequent
Debit Impairment loss / Revaluation Surplus (where prior revaluation surplus exists)
Credit Intangible Asset

#3. Cryptocurrencies earned by miners
WAIT, miners who undertake mining are not engaged in any Exploration and Evaluation of Mineral Resources, therefore IFRS 6 does not apply. Mining is a technical term used to denote the act of validating blockchain transactions with the use of computers and software to solve mathematical problems. This type of work is known as Proof of Work (PoS).

Successful solving of these problems entitle the miner to a block reward by the algorithm and transaction fees from the customer.

Where the block reward can not be traced to a customer, then the block rewards should be recognized as income measured at its fair value on an exchange.

The journal entry is:
Debit Intangible assets – cryptocurrencies;
Credit Other income in profit or loss

For transaction fees, it is paid by a customer therefore, there is an enforceable right under a contract. IFRS 15-Revenue from Contracts with Customers shall apply

The journal entry is:
Debit Bank/Cash
Revenue

Accounting for expenses incurred by the miners

Should expenses incurred by miners qualify for capitalization on the balance sheet? Miners incur expenses direct and indirect expenses in validating transactions hence their cost can not be reliably measured and traced to their work done.

Validating transactions on the blockchain is a provision of service and not an enhancement of an asset. An enhancement of the asset will be a fork that is carried out. Forks are meant to patch vulnerabilities in the blockchain network and improve upon its efficiency.

It is advised to expense them in the P&L with journal entries below:
Debit P&L
Credit Bank



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