Newsflash: Challenges with accounting for cryptocurrencies

Cryptocurrencies are considered the future of the banking and financial system as there have been a lot of technological developments around cryptocurrencies during the last decade. However, there are still many challenges surrounding cryptocurrencies like regulatory, security, price volatility, and lack of proper accounting standards and practices.

Unfortunately, currently, there is not a single accounting standard under IFRS that deals with and explains the accounting treatment of cryptocurrencies. There is a perception that cryptocurrencies are similar to other financial instruments and they should be dealt with under the available financial reporting standards like IAS 32, IAS 39, and IFRS 9. However, there are some real reasons which prevent the application of existing financial reporting standards on cryptocurrencies.

Cryptocurrencies cannot be considered equivalent to cash as they don’t meet the criteria of IAS 7-Statement of cash flow and the IAS 32-Financial instruments presentation. Despite the fact that there are hundreds of thousands of daily transactions in cryptocurrencies they cannot be readily exchanged with goods and services. Also, cryptocurrencies do not represent a legal title in most jurisdictions around the globe. Another reason is that cryptos are subject to huge price volatility.

Another interesting fact is that cryptocurrencies do not seem to meet the definition of financial instruments for the following reasons;

The mainstream accounting standards dealing with financial instruments do not seem to deal with cryptocurrencies. However, it is interesting to note that some of the businesses treat cryptocurrencies under IAS 2 – Inventories depending upon their business model. Businesses that are engaged in holding and selling cryptocurrency with the objective of generating a profit from fluctuations in price. This also means that the inventory of cryptocurrency will be treated at a lower of cost or net reliable market value. On the other hand, if an entity act as a broker-trader of cryptocurrencies, then crypto their inventories should be valued at fair value less costs to sell.

Also, there is another accounting standard IAS 38 – Intangible Assets and it appears that cryptos meet the definition of intangible assets due to the following reasons;

We will not discuss here IAS 38 in much detail but cryptocurrencies seem to be treatable under IAS 38. If a business will treat them under IAS 38 then all its provisions will be applicable to cryptocurrencies. For example, IAS 38 allows intangible assets to be measured at cost or revaluation. Using the cost model, intangible assets are measured at cost on initial recognition and are subsequently measured at cost less accumulated amortization and impairment losses.

Accounting for cryptocurrency involves a lot of judgment and uncertainty in its recognition, measurement, presentation, and disclosures. However, accountants have to disclose the basis of their judgment and reason for a particular treatment. This is not simple stuff until cryptocurrencies will get a legal status globally and accountancy bodies along with regulators will work together to design well-structured financial reporting standards. This will help to reduce the risks surrounding cryptocurrencies and will also build confidence.

Most of the accountancy firms in UAE either do not have experience in dealing with cryptocurrencies or they do not have a risk appetite. However, there are accountancy firms that have developed the skill and competency to handle the accounting of cryptocurrencies to a good extent.

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Authors

ASIF MAHMOOD
Associate Director