IFRS for cryptocurrency
Cryptocurrency has disrupted the world of finance by opening new markets for buying, selling, investing and storing value. As businesses emerge into the digital age, they turn to digital assets. They need to know how to account for them. That’s where the International Financial Reporting Standards (IFRS) comes in. IFRS sets the global standard for accounting by providing a framework for transparent and consistent reporting on financial statements around the world. This article breaks down how IFRS applies to cryptocurrency.
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Understanding IFRS
Definition of IFRS
International Financial Reporting Standards (IFRS) are a set of accounting standards developed by the International Accounting Standards Board (IASB). IFRS aims to create a single, common language for accounting, which will make financial statements comparable and transparent for users across the globe and industries. IFRS are used extensively worldwide and are becoming a global standard for financial reporting.
The Need for IFRS in Cryptocurrency
As more businesses embrace cryptocurrencies, accountants face new challenges in accounting for them. Since cryptocurrencies do not neatly fit into any existing categories in the world of financial reporting, different accounting treatments are being applied.
- Adopting IFRS,
- standardised reporting, and
- clear rules
will help accountants ensure that financial statements are prepared consistently and are reliable.
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Current IFRS Guidance Relevant to Cryptocurrency
IAS 2 – Inventories
IAS 2, for instance, sets out the accounting treatment for inventories, which can apply to cryptocurrencies held for sale in the ordinary course of business. Under IAS 2, inventories should be measured at
- the lower of cost and
- net realisable value.
For cryptocurrencies, this means the asset must be recorded
- either at the price at which it was acquired or
- at its market value –
whichever is the lower.
IAS 38 – Intangible Assets
IAS 38 addresses intangible assets, which are defined as non-monetary assets that are not physical. Cryptocurrencies held as investments could be in this category. According to IAS 38, these assets are initially recognised at cost and, after that, measured using
- the cost model or
- the revaluation model.
The cost model involves decreasing the asset over its useful life, and the revaluation model involves adjusting the asset’s value to its fair market value on each reporting date.
IFRS 13 – Fair Value Measurement
IFRS 13 addresses how to measure fair value (and IFRS 9 guides when to use fair value). Fair value is defined as the amount of consideration (i.e., cash equivalents) that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. IFRS 13 sets out the techniques for measuring fair value, including using market prices, discounted cash flow analysis, and valuation models.
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Key Considerations in Applying IFRS for Cryptocurrency
Initial Recognition
Cryptocurrencies should be recognised on the balance sheet once control of the asset has been obtained and the business expects to derive future economic benefits from it. The acquisition cost, including any transaction fees, would be recognised on the balance sheet when it was purchased.
Subsequent Measurement
Once the business has chosen between the cost model and the revaluation model for the initial measurement, it can continue to use the same model for subsequent measurement.
- The cost model is to carry the cryptocurrency at its cost, net of any impairment losses.
- The revaluation model is to revalue the cryptocurrency to its fair market value at each reporting date, which requires regular reassessment and can result in changes in reported values.
Derecognition
Cryptocurrencies are derecognised from the balance sheet when they are sold or otherwise disposed of. Gains or losses from the disposal are recognised in the financial statements. They will characterise the financial impact of the underlying cryptocurrency transactions.
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Challenges and Issues in the IFRS Application
Volatility and Fair Value Measurement
In the case of cryptocurrencies, price levels (and therefore fair value) are volatile. Businesses need to take care when measuring their assets and liabilities at fair value and use high-quality market data and valuation techniques. This can be difficult in illiquid markets, where expert advice might be needed.
Regulatory Uncertainty
Accounting practices for cryptocurrencies also can vary substantially from jurisdiction to jurisdiction. What is legal in one country may be banned or highly regulated in another. Businesses that use cryptocurrencies need to monitor relevant regulations and adjust their accounting practices accordingly. This can be time-consuming and ongoing.
Accounting for Different Types of Cryptocurrencies
Different types of cryptocurrencies (e.g., utility tokens and security tokens) may require different accounting treatments. The nature and use of the cryptocurrency also need to be considered in more detail. For instance,
- the specific attributes,
- applications,
- intended use, or
- other similar matters may be relevant.
Disclosure Requirements under IFRS
Required Disclosures
Businesses are required to disclose their cryptocurrency holdings, including
- the type and quantum of cryptocurrency held,
- the valuation methodology and key assumptions, and
- the risks associated with holding cryptocurrencies.
Detailed disclosures promote transparency and allow stakeholders to gather useful information.
Enhancing Transparency
Good reporting helps build trust with stakeholders. In this context, this means providing good notes on the valuation methods and risk management related to cryptocurrency holdings and their impact on the financial statements. Transparency regarding the financial position and performance of the operations will help stakeholders better understand the financial statements.
Future Developments in IFRS for Cryptocurrency
Ongoing Projects and Discussions
The IASB is examining how digital assets such as cryptocurrencies should be accounted for and is working on ongoing projects and discussions on this. Businesses can keep themselves updated with these developments so that they are compliant with future standards.
Impact on Businesses
Cryptocurrency-trading businesses need to plan to ensure they are able to respond to future changes in IFRS.
- They should adopt effective accounting procedures,
- Invest in appropriate accounting systems, and
- Train staff to prepare for the accounting requirements of a rapidly evolving crypto environment.
Conclusion
Cryptocurrency has made the world more complex. It has shown that we need a standardised way of accounting. IFRS is a framework of globally accepted accounting standards. It provides a common language for businesses and investors to understand financial statements and report financial performance. IFRS for crypto also guides accountants on how to translate the complex technical accounting issues of digital assets into financial reporting. By following relevant IFRS standards,
- businesses can ensure accurate financial reporting,
- compliance with the law and better decision-making.
In the future, as cryptocurrency evolves, businesses will need to stay informed and adaptable to keep up with the latest trends.