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Many accountants who are quite acquainted with conventional accounting practices find it hard to adapt themselves for accounting for cryptocurrencies. This is because, at present, cryptocurrencies do not have any accounting standards in place. There is no standard guide that would explain to professionals how to handle accounting for digital currencies like bitcoin and others.
What is cryptocurrency?
Cryptocurrencies like bitcoin are digital currencies or token that uses a value obtained through a shared ledger structure. This shared ledger is called the blockchain. Cryptocurrency is a medium of exchange of digital value, distributed in the form of tokens. These tokens may be owned by an organization. When the tokens are exchanged among users, this organization makes an entry in the ledger with the help of a special key for that particular currency. However, this organization only stores the key to the blockchain and not the token itself. The tokens are not stored locally with the organization. This organization can only store limited information with them.
How to do accounting for cryptocurrency?
A common tendency when accounting for the cryptocurrency is to account for an equivalent amount of cash. This is a wrong practice as cryptocurrency cannot be directly used in exchange for any goods or services. Even though some merchants are accepting payments in the form of digital currency, but these are few, and cryptocurrency payment is not a standard practice. Cryptocurrencies are not considered a legal tender; hence most payments are not in the form of cryptocurrencies.
There are reasons for this. Cryptocurrencies are highly volatile. Their value can change in even the shortest durations. This causes issues in converting the value of the cryptocurrency to legal currency or cash. During conversion, the value of the currency equivalent in cash may fluctuate, and there is an inherent risk in the conversion process. This is why the law does not provide any guidelines for conversion for cryptocurrency.
It is often wrongly assumed that cryptocurrency is considered a financial asset at fair value. But cryptocurrency does not satisfy the definition of a financial instrument as it cannot be converted to cash, nor it is equity or any other contract for payment. It can also not be used as a debt security or equity security. Therefore, cryptocurrencies cannot be considered equal to a financial asset while accounting.
However, according to Indian law, digital currencies can be considered an intangible asset. The IAS 38 defines an identifiable non-monetary virtual asset as an intangible asset. An asset that originates from legal rights or is separable is termed an identifiable asset. A separable asset can be divided from the organization and transferred or sold or exchanged for any purpose, by an individual or by an entity, under a contract. Cryptocurrency happens to meet this condition of IAS 38.
Also, in accordance with the IAS 21, cryptocurrency also does not provide the holder of the currency any right to receive(or deliver) a fixed number of units of the particular currency. This is an important feature of a non-monetary asset.
Cryptocurrency holding organizations are traded, and therefore, these organizations expect to receive financial benefits. But the problem is that cryptocurrencies are extremely fluctuating in value and therefore considered non-monetary. They also do not have any physical value since they are purely digital. This is why the law classifies cryptocurrencies as intangible assets.
The intangible assets can be measured according to the IAS 38 at their cost or revaluation. With the cost model, they are measured at cost on original recognition and later on impairment losses. With the revaluation model, if there is a market for the cryptocurrency, it can be taken at a revalued amount. However, this may not be possible for all cryptocurrencies. Ideally, the same measurement model is required to be used for every currency. If there is no market for a currency, then in place of the revaluation model, the cost model can be used.
An increase in revaluation value should be identified as profit or loss by as much as it reverses a drop in the revaluation of the same asset that was earlier considered of as profit or loss. Profit or loss is a good way to identify a revaluation loss. Intangible assets usually do not have active markets, but cryptocurrencies are normally traded on the exchange. This may make it probable to apply the revaluation model.
It is also important to determine the fair value of the cryptocurrency token. This determination can be made only if there is an active market for the currency. In the case of bitcoin, such as the exchange market exists, it is easy in the case of bitcoin to determine the fair value. Due to an active market, a quoted price on the exchange is the most trusted source of the fair value of the currency. There is no adjustment to be made in finding the fair value in this case. This exchange or the currency organization should also suggest the most beneficial market for the cryptocurrency.
The cryptocurrency organization will also need to determine the life of the currency. In the case of indefinite life, there is no limit of time in which the holder can expect to generate value in cash in exchange for the currency. According to IAS 38, cryptocurrencies are to be identified as having an indefinite life. This also requires the particular cryptocurrency to undergo annual testing for impairment.
According to IAS 2, inventories, with respect to the currency’s organization’s business model, accounting for the cryptocurrency is appropriate because it can be used for sale in business, or in the production of sale. It can also be used as material or supply that can be made use of during delivery of services of production of goods.
There is a lot of speculation and uncertainty regarding the use and validity or recognition of cryptocurrencies. This is why authorities expect a certain level of disclosure or disclaimer before users can use it. IAS 1, “presentation of financial statements,” makes provision for disclosure of terms on behalf of the organization, especially when this disclosure has a significant impact on the usage and value of the cryptocurrency in the accounts.
As per IAS 10, after the reporting period, the organization is also required to disclose any information about the change in value after reporting period, if the non-disclosure of that information could cause the users to change their decisions regarding the financial statement.
All this information is proof that accounting for cryptocurrencies is not simple and involves deep knowledge and careful handling of accounts and the value of the cryptocurrency in consideration. As no particular standard by IFRS for cryptocurrency currently exists, accountants need to take lessons and references of the existing accounting provisions.