Crypto currencies are fast becoming a regular balance sheet item with many individuals as well as corporates interested in diversifying their portfolios. A good example being Business Intelligence (BI) application software vendor, MicroStrategy‘s investments in Bitcoin.
Before we start discussing how to treat crypto assets in your company’s financial statements, it’ll be useful to have a think about the basics. Here is our article that speaks about some basic crypto concepts.
Companies that want to experiment with crypto currency must ensure that their tax and accounting systems are able to cope. Given it’s a relatively new industry, a lot of the accounting around their presentation are incredibly manual. For, e.g. while you might be very used to having bank feeds for your GBP or USD bank accounts; you won’t have this for your crypto accounts.
Let’s discuss some aspects relevant for the accounting of cryptocurrencies.
1. Understanding the use of cryptocurrencies in your business
Businesses can use cryptocurrencies as a form of diverse investment or as a means of settlement, such as for payments. It’s more likely to be used operationally by companies within the crypto space, such as SAAS businesses that are building crypto-based products. Suppliers within the same industry and likely to accept payments in crypto as much as they use fiat.
Global & US Tax Blockchain & Digital Assets leader Rob Massey at Deloitte Tax remarks in this article, "There’s a number of people that believe it’s not too far out anymore that we can actually start using smart contracts and programmable money to elevate commerce. If you think it’s not too far out, then why not start to engage in using crypto as a method of payment now, just in terms of readiness.
The treatment of cryptocurrencies are very much unique to each company and function. So this needs to be carefully considered and where appropriate, seek advice from independent professionals.
2. Where does crypto sit on your financial statements?
In this technical article published by ACCA, they’ve explored the various ways this asset can be treated.
- There is a natural tendency to treat them like cash as wallets are very similar to bank accounts. According to IAS 7 cash equivalents are ‘short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Cryptocurrencies are subject to very high levels of volatility and they are not yet accepted as legal tender. So they can't be treated as cash / cash equivalents.
- Can they be considered as financial assets? That doesn’t seem likely either as they don’t represent cash, an equity interest in an entity, or a contract establishing a right or obligation to deliver or receive cash or another financial instrument. (Refer IFRS 9)
- Intangibles then seem the most likely way to go. Crypto currencies fit the description for intangibles well as they don’t have a physical substance. They are also capable of being separated from the holder and sold or transferred individually and, in accordance with IAS 21, it does not give the holder a right to receive a fixed or determinable number of units of currency.
3. Can they be treated as stock?
Under certain circumstances, crypto currencies can be treated as stock. You’ll need to check if the company’s use of cryptocurrencies falls into the following cases,
held for sale in the ordinary course of business
in the process of production for such sale, or
in the form of materials or supplies to be consumed in the production process or in the rendering of services.
Companies that have upcoming ICOs for their own tokens should take note of this, as it’s relevant for how you’ll account for the tokens you would be minting for sale.
4. Accounting for crypto’s volatility
As demonstrated, general accounting around these asset types is not easy. There are a lot of manual steps involved apart from the complexity arising from their use within your business. They are also very famously volatile within very short periods of time, hence not comparable to general forex unpredictability such as we’re used to for fiat. How do you account for these changes in value over a period?
We now go back to whether we treat cryptocurrencies as stock or intangibles. We’ll only discuss the intangible aspect in this article.
- Per IAS 38, intangibles can be measured at cost or as per a “revaluation model”. A revaluation model can only be used if there is an “active market” for the asset. Hence in most circumstances, intangibles (think patents) end up being valued at a cost. This is then amortised over a period. Amortisation is like depreciation for a fixed asset, in a layman’s terms. Most known cryptos such as Bitcoin or Eth have an active trading market (exchanges); hence a revaluation model can be applied to them.
When assets held are revalued, a gain or loss will appear. A revaluation gain is recognized via the account “Other comprehensive income” which is an equity account in the Balance Sheet. Even though, that sounds simple enough there are other factors that needs to be very carefully considered. For e.g. the accounting standard also says that in case of a revaluation loss occurring, that can only be recognized via the other comprehensive income to the extent a gain was previously posted. Any excess loss should go through the profit & loss account.
So they need to be very consistently revalued over specific periods of time, with checks and balances in place to track a gain/loss. Given there are only a handful of tools that help with this and none really that suits an SME, using a google sheet to capture this month on month maybe cost-effective. If you use an accounting software such as Xero, the sheet itself can be attached to the journal entry that will be passed at month-end to create an audit trail.
As can be seen, it’s a near impossible task to look at all the nuances of learning the accounting for cryptocurrencies. Consistency in both the method as well as the process of data-capture are critical.
5. Resources for checking a crypto’s value
There are many useful websites one can use to check a cryptocurrency’s value over time. https://coinmarketcap.com/ and https://www.coingecko.com/en are two popular websites that provides current as well as historical values for cryptocurrencies. If you use trading exchanges such as Coinbase, it’ll be very valuable to note down the value generated at purchase or sale of such assets. You can save screenshots of the transactions while placing a trade which can then become a reliable measure of what was the value at a specific point and time.
We’ll discuss more about crypto currencies held for sale and their treatment in upcoming articles.
Disclaimer – There are 1000s of cryptocurrencies now available via public exchanges. And the use of each differs across businesses. If you need specific information on how to manage these transactions on your company’s accounts, please get in touch with us. You can write to email@example.com if you require further information.
Note that we are not crypto investment advisors and cannot provide information on buying and selling crypto.