Introduction
In present days, the topic "cryptocurrency" is a very familiar word to all of us. With the attention of few blue-chip companies in the usage of cryptocurrencies such as HSBC and SpaceX, this has become a very famous topic.
As Accounting Professionals or Students, It's not enough to understand the meaning of the terminologies behind this cryptocurrency but also need to understand the working mechanism behind it to make effective decisions and make financial benefits both personally and as an organization.
Simply a Cryptocurrency is a digital currency based on cryptography (encrypted Algorithms). Cryptography works as Security which makes it difficult to counterfeit. Be careful I have used the Phrase "Make it Difficult" not to avoid since still, we do not know A to Z about the Negatives of these Cryptocurrencies. Cryptocurrency works using a technology called "Blockchain".What are the Most Famous Cryptocurrencies in the World as of Today?
There are 1000 Plus Cryptocurrencies introduced to the market by now by various institutions. However, for your information, the following are the most famous as of today.
- BITCOIN (BTC) - This is the first Cryptocurrency introduced to the world in 2009 by Satoshi Nakomoto. By now this is the cryptocurrency having the highest value in terms of USD.
- Ethereum (ETH) - Introduced in 2014 by a Russian-Canadian programmer.
- Stellar (STL)
- Binance Coin (BNB)
- Cardono (ADA)
- Dogecoin (Doge)
- Litecoin (LTC)
- Bitcoin Cash (BCH)
- Chainlink (LINK)
How this works?
To hold cryptocurrencies, you need to have a Special Place Called "Wallet". This can be an Online Wallet (Software Wallet) or a Hardware Wallet (Bitcoin-enabled watch, Mobile Phone Etc.)
If you need to trade Cryptocurrencies, you need to get registered with an Exchange. Currently, there are large no Cryptocurrency exchanges available online, where the following can be recommended;
- Coinbase - Click Here to Join
- Binance - Click Here to Join
This is the one Side of the cryptocurrencies where today's generation earns so much money out of it. Lear it and Try it.
Financial Reporting Aspect of Cryptocurrencies
As I mentioned above, not only individuals but also most companies are also Moving towards the use of cryptocurrencies in their day to day transactions and they Hold them as a short-term or long-term investments.
As a result of above, accounting for such transactions with cryptocurrencies has become a recent discussion topic of Most of the accounting standard setters such as IASB and FASB.
From this point onwards, I will discuss the guidelines issued by IASB regarding the Holding of Cryptocurrencies. For this discussion I am mainly referring to the article publised by IASB on 21-Jun-2019.(https://www.ifrs.org/content/dam/ifrs/supporting-implementation/agenda-decisions/holdings-of-cryptocurrencies-june-2019.pdf)
What is a Cryptocurrency as per IASB?
IASB Committee defined Any crypto asset with the following characteristics as a "Cryptocurrency".
- Virtual or Digital currency which keeps records on a distributed ledger ( Blockchain) and Use Cryptography for security.
- Not issued by any central regulating authority
- Not forming a Contract between the holder and another party
Can a Crypto Currency be Treated as an Intangible asset under IAS 38?
IAS 38 - Intangible Assets defines an intangible asset as ‘an identifiable non-monetary asset
without physical substance’. (Paragraph 12 of IAS 38)
States that an asset is identifiable if it is separable or arises from contractual or
other legal rights. An asset is separable if it ‘is capable of being separated or divided from the entity and
sold, transferred, licensed, rented or exchanged, either individually or together with a related contract,
identifiable asset or liability’. (Paragraph 12 of IAS 38)
The Effects of Changes in Foreign Exchange Rates states that ‘the essential feature
of a non-monetary item is the absence of a right to receive (or an obligation to deliver) a fixed or
determinable number of units of currency’. (Paragraph 16 of IAS 21)
Thus, the Committee concluded that a holding of cryptocurrency meets the definition of an IA as per IAS 38 on the grounds that
(a) it can be separated from the holder and sold or transferred
individually; and
(b) it does not give the holder a right to receive a fixed or determinable number of units
of currency.
What if cryptocurrencies are held for sale?
As per IASB Committee, if they are held for sale in the ordinary course of business, then IAS 2 - Inventories standard will be applied. If IAS 2 is not applicable, the entity should apply IAS 38 in accounting for cryptocurrencies.
Why Cryptocurrencies are not a financial asset?
As per the committee, Cryptocurrencies are not financial assets. This is mainly due to the argument that Cryptocurrency cannot be treated as Cash. Nor it is an equity instrument / Debt instrument of another entity. It does not give rise
to a contractual right for the holder. Further, it is not a contract that will or may be settled in the holder’s own
equity instruments.
Why Cryptocurrencies are not treated as Cash?
Paragraph AG3 of IAS 32 states that ‘currency (cash) is a financial asset because it represents the medium of exchange and is, therefore, the basis on which all transactions are measured and recognized in financial statements. (Extracted from IAS 32)
As per the above, "Cash" is expected to be used as the medium of exchange and the monitory unit in pricing goods or services to an extent that it can be the basis for all transactions recognized and measured in financial Statements.
As per the IASB committee, even though there are some cryptocurrencies that can be used to buy products or services, the committee is not aware of any cryptocurrency which can be used as a monitory unit in pricing goods or services to an extent that it can be the basis for all transactions recognized and measured in financial Statements.
Thus, the Committee concluded that a holding of
cryptocurrency is not cash because cryptocurrencies do not currently have the characteristics of cash.
I hope this explanation added some value to your financial reporting insights. I would be glad to hear your thoughts and comments to improve myself.
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References and Sources used to Write the Article
https://www.ifrs.org/projects/completed-projects/2019/holdings-of-cryptocurrencies/#published-documents
References and Sources used to Write the Article
https://www.ifrs.org/projects/completed-projects/2019/holdings-of-cryptocurrencies/#published-documents
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Article Written By: H.Harshana Sameeraka & Ishani Asangika
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