Accounting for Cryptocurrency

Guide to accounting for cryptocurrency

2010 marked the first real-world cryptocurrency transaction, when a man in Florida, US negotiated to pay 10,000 Bitcoins for two Papa John's pizzas priced at about $25. Since then, global interest in cryptocurrency has exploded along with a rapid increase in its value and volatility. 

Today, the cryptocurrency market is valued at over USD $850 billion and it’s estimated more than 300 million people around the world use or own cryptocurrencies.

As crypto becomes a more widely-accepted currency for investments and transactions, accountants need to know how these financial assets should be categorised and treated under accounting standards such as the International Financial Reporting Standards (IFRS).

This article covers the fundamentals of accounting for cryptocurrency: what is cryptocurrency, what accounting standards apply to crypto and what the future could hold.

What is cryptocurrency?

Cryptocurrency is any type of digital currency in which transactions are anonymously verified and secured by a decentralised system (called a ‘digital ledger’ or ‘public ledger’) using cryptography, rather than by a centralised authority such as a bank.

Some of the most popular cryptocurrencies today include:

• Bitcoin
• Ethereum
• Tether
• USD Coin
• BNB
• Binance Coin
• XRP
• Dogecoin
• Cardano

Units of cryptocurrency are generated through a process called cryptocurrency mining. This involves using computers to solve complicated mathematical puzzles that generate coins. Cryptocurrencies can then be bought from brokers, before being stored and spent using digital crypto wallets.

Any time a cryptocurrency transaction occurs, it’s recorded in the digital ledger and added to a block with other transactions. This is called blockchain. 

Blockchain cryptography is notoriously secure because the network is decentralised, which means data is spread across multiple locations. In order to access the network and tamper with transaction data, hackers would have to individually break into every block in the blockchain.

How a crypto transaction works on the blockchain

1. A person requests a transaction.
2. A block representing the transaction is created.
3. The block is sent to all locations (called ‘nodes’) in the network.
4. Network nodes record and validate the transaction.
5. Relevant parties are notified that the transaction is complete.
6. The block is added to an existing blockchain.

What accounting standards apply to cryptocurrency?

The growth of the cryptocurrency market has created a new layer of complexity for accountants and bookkeepers. 

While a growing number of businesses and entities are recognising cryptocurrencies as payment, they’re not yet a common medium of exchange and aren’t classified as legal tender. Businesses can choose to accept payment in the form of cryptocurrency but they’re not required to do so.

As such, although cryptocurrency is a form of digital money, it can’t be accounted for as cash according to the International Accounting Standard 7 Statement of Cash Flows (IAS 7) or the International Accounting Standard 32 Financial Instruments: Presentation (IAS 32) because it can’t be readily exchanged for goods or services.

This brings into question how to recognise, record and disclose activities relating to issuing and investing in cryptographic assets such as Bitcoin and other cryptocurrencies. In short, there are no accounting standards that specifically address crypto assets and liabilities. However, they need to be taken into consideration under the current International Financial Reporting Standards (IFRS).

How to account for cryptocurrency

In June 2019 the IFRS Interpretations Committee met to discuss the accounting treatment of cryptocurrencies. The Committee concluded that holdings of cryptocurrencies should be accounted for under IAS 38 Intangible Assets, unless they are “held for sale in the ordinary course of business”, in which case they would be classified under IAS 2 Inventories.

So what does this mean for Singaporean entities, accountants and bookkeepers?

According to the Institute of Singapore Chartered Accountants, “As the broad policy intention of the Accounting Standards Council of Singapore is to adopt the IFRS Standards as issued by the IASB, the agenda decision on the application of IFRS Standards is also relevant to Singapore entities reporting under SFRS(I) or FRS.”

In other words, holdings of cryptocurrency should be accounted for as either intangible assets or inventory based on the IFRS ruling above.

The future of crypto accounting

Crypto assets will need to be accounted for in financial statements more frequently as they increasingly overlap with real-world physical assets and become a more widely accepted investment option for businesses.

This could mean a couple of things for crypto accounting standards:

• The current IFRS standards could be amended to make accounting for cryptocurrencies clearer and more straightforward
• A new, standalone IFRS standard could be developed to address the treatment of crypto assets and liabilities

In either case, the rise of cryptocurrencies will impact the work accountants do and the standards they need to be aware of when reporting assets and liabilities.

As crypto becomes an increasingly mainstream asset class, accountants, CPAs and auditors could also capitalise on opportunities to offer expert advice about cryptocurrency and blockchain.

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