What is cryptocurrency
A peer-to-peer system known as cryptocurrency allows anybody, anywhere to send and receive money. Payments made using cryptocurrencies do not exist as actual physical coins that can be transported and exchanged; rather, they only exist as digital entries to an online database that detail individual transactions.
Types of accounting standards used to account for cryptocurrency
Currently there is no accounting standards been issued to explain how to account for cryptocurrency.
A few standards come to mind when considering the accounting for cryptocurrencies held by an entity for its own account.
Cash and cash equivalents
Because they cannot be easily traded for any good or service, cryptocurrency cannot be regarded as being similar to money (currency) under FRS 7.
Cash equivalents are characterised by FRS 7 as “short-term, highly liquid investments that are easily convertible into known sums of cash and which are subject to a small risk of changes in value.” Since cryptocurrencies are highly volatile in terms of price, they cannot be categorized as cash equivalents. Therefore, it doesn’t seem like digital currencies are equal to cash or other assets that may be recorded using FRS 7.
Financial asset at fair value through profit or loss (“FVTPL”)
Since cryptocurrency does not reflect cash, an ownership stake in a firm, or a contract establishing a right or obligation to supply or receive cash or another financial instrument, it does not appear to fulfill the definition of a financial instrument under FRS 109. Due to the fact that cryptocurrency does not reflect an ownership stake in an organisation, it is neither a debt security nor an equity security (although a digital asset may take the form of an equity security). Consequently, it would seem that cryptocurrencies should not be treated as financial assets.
Inventory
Due to FRS 2’s application to inventories of intangible assets, it may be reasonable to account for cryptocurrencies in compliance with it. Inventories are defined as assets held for sale in the normal course of business in FRS 2.
A business may hold cryptocurrency for sale in the ordinary course of business, in which case the cryptocurrency may be treated as inventory. Generally, this means that inventory is shown at the lower of cost and net realisable value. However, if an entity acts as a cryptocurrency broker-dealer, FRS 2 states that its inventory is measured at fair value less costs to sell.
This type of inventory is acquired primarily with the intention of selling it in the near future and making a profit from price movements or broker-dealer margins. Therefore, this valuation method could only be applied to the very narrow case where the business model sells cryptocurrencies in the near future to profit from price fluctuations.
Intangible asset
Cryptocurrencies appear to meet the definition of intangibles under FRS 38, Intangible Assets. This standard defines intangible assets as identifiable non-monetary assets without physical substance. FRS 38 states that an asset is identifiable if it is separable or arises from a contractual or other legal right. An asset is separable if it can be separated or divided by entity and sold, transferred, licensed, leased, or exchanged separately or together with related agreements, identifiable assets or liabilities.
FRS 38 permits intangible assets to be measured at cost or revaluation. Using the cost model, intangible assets are measured initially at cost and then at cost less accumulated amortisation and impairment losses. The revaluation model allows intangible assets to be recognised at their revalued amount when an active market exists. However, this is not true for all cryptocurrencies. All assets of a given asset class must use the same valuation model. If there are assets in the asset class valued under the revaluation model that do not have an active market, those assets should be valued under the cost model.
FRS 38 states that a revaluation increase should be recognised in other comprehensive income and accumulated in equity. However, a revaluation increase should be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset that was previously recognised in profit or loss. A revaluation loss should be recognised in profit or loss. However, the decrease shall be recognised in other comprehensive income to the extent of any credit balance in the revaluation surplus in respect of that asset. It is unusual for intangible assets to have active markets. However, cryptocurrencies are often traded on an exchange and therefore it may be possible to apply the revaluation model.
