A cryptocurrency is a digital asset designed to work as a medium of exchange that uses strong cryptography to secure financial transactions, control the creation of additional units, and verify the transfer of assets.
Cryptocurrencies use decentralized control as opposed to centralized digital currency and central banking systems. The decentralized control of each cryptocurrency works through distributed ledger technology, typically a blockchain, which serves as a public financial transaction database.
While Bitcoin is the most well-known cryptocurrency, it is not the only one. Other major types of cryptocurrencies include Ethereum, Ripple and LiteCoin.
Accounting for cryptocurrencies
There are no accounting standards that specifically deal with cryptocurrencies. When there are no accounting standards dealing with an issue, accountants should develop an accounting policy relating to the matter that can be applied and disclosed.
In developing the policy, IAS 8 requires that the directors consider the following hierarchy:
- IFRSs dealing with similar issues
- The Conceptual Framework
- The most recent pronouncements of other national GAAPs
The current discussion on cryptocurrencies from professional bodies and accountancy firms focuses on which IFRS can be applied to this area. They generally agree that cryptocurrencies:
- Do not meet the definition of cash under IAS 32, as they are not generally accepted as legal tender
- Do not meet the definition of financial assets, as they do not give a contractual right to receive cash or other financial assets
- Do not have any physical substance
Therefore, based on the above, the most obvious option is IAS 38, but in reality the accounting method depends on the purpose of your holding:
Cryptocurrency held for trading
If your business is to act as a broker-trader of cryptocurrencies, then you should apply IAS 2 and the cryptocurrencies should be measured at fair value less cost to sell.
Cryptocurrency held for capital appreciation
If you acquired cryptocurrencies for capital appreciation (i.e. bought it with the expectation of selling it at a higher price to make a profit), then you have to apply IAS 38. Under IAS 38 you can choose between:
- Cost model
- Revaluation model
Even though the specific standard permits a choice between the 2 models, the revaluation model provides more relevant (up-to-date) information compared to the cost model.