Date: Wednesday 26th February 2020
Author: Paul Zammit
Over the past months, pronouncements and guidance in relation to the accounting for cryptographic assets have been released.
Cryptographic assets include the following broad categories:
- Cryptocurrencies, such as Bitcoin, which could be held by an entity on its own behalf or on behalf of its customers.
- Other cryptographic assets.
Other cryptographic assets include:
- Security tokens, which are tied purely to an underlying financial instrument, and are accounted for as a purchase of the underlying financial instrument.
- Asset-backed tokens, which are tied purely to underlying physical assets, and are accounted for as a purchase of the underlying asset.
- Utility tokens, which are tied to future economic benefits, such as the redemption of goods and services.
- Hybrid tokens, which contain characteristics of two or more of the above, and would require judgement and interpretation on a case-by-case basis.
In the following paragraphs we’ll mainly discuss cryptocurrencies and utility tokens.
ACCOUNTING FOR CRYPTOCURRENCIES
The guidance released clearly states that cryptocurrencies owned by an entity are not accounted for as cash or as financial assets, but rather, as inventories or intangible assets. Typically, cryptocurrencies held for the long term are accounted for as intangible assets, whilst other cryptocurrencies are accounted for as inventories. If the entity in question trades cryptocurrencies on a very frequent basis and with speculation intentions, the entity may meet the definition of a commodity broker-trader in IAS 2, in which case it would account for inventories at fair value less costs to sell, rather than at the lower of cost and NRV, which would be more suitable for an entity that uses cryptocurrencies in the short-term, but just as a means of payment.
In the case of entities holding cryptocurrencies on behalf of customers, there may be sufficient grounds to leave cryptocurrencies off balance sheet, especially if there is clear segregation between the entity’s assets and the cryptocurrencies in question.
Miners of cryptocurrencies incur hefty operating expenses in their quest to mine cryptocurrencies. Such expenses are expensed and cannot be capitalised. This is because the future economic benefit of managing to mine a cryptocurrency cannot be considered as probable.
Once the cryptocurrency is mined, miners receive two rewards:
- A block reward, which is earned for having mined the cryptocurrency. This is accounted for as other income.
- Transaction fees, which are earned for validating a specific transaction. This can be accounted for revenue since there is a customer paying such fee.
ACCOUNTING FOR UTILITY TOKENS
Accounting for utility tokens depends on whether the entity is a token holder or a token issuer.
In the case of a token holder, the accounting may be similar to that of a cryptocurrency, in certain respects. The token is accounted for as an intangible asset if its being held for the long term, and as inventory if its being held for the short term. However, if the token is expected to be redeemed in future goods and services, it may be more appropriate to recognise it as a prepaid expense.
In the case of a utility token issuer, the accounting changes completely. Typically, the entity would have embarked on a crowdfunding process. A white paper is released, setting out relevant details of a project, as well as relevant terms and conditions. Initially, the issuing entity will collect funds from those interesting in funding the project. Therefore, the debit entry would typically be normal (FIAT) currency, or cryptocurrency. It may be more challenging to determine the credit entry. The best way to approach this is to consider the obligations that the entity has upon receiving the funds. The entity may have an obligation to refund the token holder up to a certain point in time – for instance, until the project takes off. This would require the recognition of a financial liability. In the absence of a financial liability, an entity may need to recognise a contract liability in line with IFRS 15 ‘Revenue From Contracts With Customers’. This represents the obligation of the entity towards the customers when the customers exercise their rights to goods and services. If the obligation meets the definition of a provision, a provision may need to be recognised. There may also be circumstances in which the entity has no obligations from the moment the funds are received. In such case, it may be acceptable to recognise revenue immediately (or other income, if the token holder doesn’t meet the definition of a customer).