Demystifying Crypto Accounting
Co-Founder, Savecoins Technologies.
You’ve probably wondered how accounting for cryptocurrrencies work due to some of the inherent nature of this asset class. The absence of clear regulations in this space has made reporting for crypto assets quite chaotic for both professional and newbie accountants who get confused if these assets are securities, currencies or commodities.
The requirements for financial reporting related to cryptocurrencies, for both investors and enterprises, are referred to as cryptocurrency accounting.
Understanding what cryptocurrencies mean.
A distributed ledger system called a blockchain is used to store information about cryptocurrency, a digital token. There are numerous usage privileges granted by these tokens. Cryptocurrencies, for instance, are designed to be used as a form of exchange. Other digital tokens provide access to additional goods or services or act as a substitute for ownership interests.
Consumers, businesses, and governments are showing a growing level of interest in and attention toward cryptocurrencies and other digital assets. Consumers are increasing the amount of exposure in their personal investment portfolios, large payment processors are scaling up the ability to send and receive payments in digital assets, and both private and public companies are exploring and increasing their investments in digital assets; their holdings are becoming more substantial.
Tesla added Bitcoin to its statement of financial position (Balance Sheet) in the first quarter of 2021 for a total of $1.5 billion. In the second quarter of 2021, Microstrategy increased their Bitcoin holdings by approximately $500 million. Even though digital assets are getting more attention, the financial reporting for these assets doesn’t neatly fit into existing accounting rules.
What are stablecoins?
To have a better understanding of crypto accounting, it is paramount to know what stablecoins means.
Stablecoins are digital currencies with their value tied or pegged to another money, good, or financial instrument. Examples of stablecoins are USDT, USDC and BUSD. These cryptocurrencies are pegged 1;1 to the US Dollar through different backing either by cash deposits or government bonds.
In the balance sheet, stablecoins can be treated as cash equivalents because they can easily be redeemed for the fiat currency they are pegged to.
Crypto reporting problems with current accounting standards
Sadly, you cannot account for a crypto asset with the same guidelines that apply to cash and its equivalents (except stablecoins). It would appear to be the easiest and most obvious way to account for cryptocurrencies at first, but it has several drawbacks. Crucially, unlike currency or its counterpart, the value of digital assets frequently fluctuates significantly.
Cash, or a cash equivalent, must by definition be subject to a negligible risk of change in fair value.
However, according to IAS 38, Intangible Assets, — digital currencies do seem to fit the definition of an intangible asset. According to this definition, an identified non-financial item that lacks physical substance is an intangible asset.
According to IAS 38, an asset is distinguishable if it can be divided up or derives from a legal right or contract. When an asset can be sold, transferred, licensed, rented, or exchanged either separately or with another connected contract, identifiable asset, or obligation, it is said to be detachable.
How accounting standards will affect crypto reporting
Cash equivalents are characterized under IAS 7 as short-term, highly liquid investments that are easily convertible into known sums of cash and which are subject to a minimal risk of changes in value. Since cryptocurrencies are highly volatile in terms of price(except stable coins), they cannot be categorized as cash equivalents. As a result, it doesn’t seem like digital currencies are similar to cash or other forms of money that may be recorded using IAS 7.
According to IFRS 9, it would seem intuitively correct to account for cryptocurrencies as financial
assets at fair value through profit or loss (FVTPL). Because it does not reflect currency, an ownership stake in an organization, or a contract establishing a right or obligation to deliver or receive cash or another financial instrument, it does not appear to fit the definition of a financial instrument.
Due to the fact that cryptocurrency does not reflect an ownership stake in an organization, it is neither a debt security nor an equity security (although a digital asset may take the form of an equity security).
Therefore, it would seem that cryptocurrencies should not be considered financial assets.
Intangible assets may be valued or assessed at cost under IAS 38. Intangible assets are initially valued at cost under the cost model, and they are subsequently valued at cost less accumulated amortization and impairment losses. Intangible assets can be carried at a revalued amount under the
revaluation model if there is a market for them, albeit this may not be the case for all cryptocurrencies. All assets in a given asset class should be measured using the same methodology.
Assets should be measured using the cost model if there is no active market for them in the class of assets measured using the revaluation model.
According to IAS 38, an increase in revaluation should be included in other comprehensive income
and added to equity. To the extent that a revaluation increase of the same asset reverses a revaluation drop that was previously recognized in profit or loss, it should be included in profit or loss. Recognizing a revaluation decrease in profit or loss is necessary. To the extent that there is a credit balance in the asset revaluation excess, the decline will be included in other comprehensive
Intangible assets don’t typically have active markets. But because cryptocurrency is frequently exchanged on an exchange or aggregator, it might be conceivable to use the revaluation
IFRS 13, Fair Value Measurement, should be utilized to calculate the fair value of the cryptocurrency in cases where the revaluation model can be used. To ascertain if there is an active market for specific cryptocurrencies, judgment should be used as IFRS 13 defines an active market. It is simple
to show that such a market exists because Bitcoin is traded every day.
When available, fair value is measured without adjustment using a reported market price from an active market, which offers the most trustworthy proof of fair value. Additionally, the organization needs to identify the main or most advantageous market for the cryptocurrencies.
What entries should your company make in its ledger for cryptocurrencies and other digital assets?
Even though cryptocurrency transactions include many unusual difficulties, they still count as assets for the purposes of basic accounting rules.
When your company buys bitcoin, you should record the asset at its fair market value as of the purchase date on your balance sheet. By entering a debit into the asset account, this is accomplished.
If your company used fiat money to buy the virtual currency, you would charge the equivalent amount to your cash account.
You act in the exact opposite way when your company sells the asset afterwards. Debit your cash for the amount of your earnings or other forms of compensation, and credit the asset to remove it from your balance sheet at its book value.
The revenues could exceed the assets current book value by a significant amount. You might alternatively record a credit to a capital gain account reflecting the discrepancy between the book
value and the funds received, whether as a result of impairment, appreciation, or both.
How should your company track vendor payments?
When paying a vendor with cryptocurrency, you must document the transaction in the same way that you would if you were selling the cryptocurrency.
In either case, it constitutes as a disposal, in which case you would record a capital gain equal to the discrepancy between the outlay and the digital assets book value.
Consider that you have 250,000 worth of Ethereum on your balance sheet. The fair worth of the coin has increased to $350,000 since you bought it.
Your company uses an intangible asset instead of cash to pay $350,000 to the Chartered accountant in charge of your audit.
You would debit your professional services expense account by $350,000, credit your Ethereum asset account by $250,000, and debit your capital gain account by the remaining $100,000.
Notably, if the asset’s fair value dropped to $150,000 at some point while it was on your balance sheet, there probably wouldn’t be a capital loss upon disposal before it was restored to its present value of $350,000 since you already recorded impairment when the value reduction occurred.
How Savecoins report for cryptocurrencies
The volatile nature of crypto assets means Savecoins as a business will hold most of her liquidity(money) in USD stablecoins which will be treated as cash equivalents because they can be redeemed for cash (Fiat) at any given time. The stablecoins that savecoins holds will be used as an exchange liquidity for
the crypto asset that a customer wants to DCA into or hold in his portfolio.
Assets that customers hold or DCA into will be treated as Assets under management.