From the IFRS Institute – September 9, 2022
In the last two years, digital assets have been increasingly adopted by retail and institutional investors worldwide – creating and transforming traditional business operations and bringing price volatility as well as a whole host of new risks and opportunities. This activity comes amidst a lack of IFRS Standards and US GAAP guidance addressing the accounting for these assets, which often end up being treated as intangible assets and carried at cost less impairment losses. Here, we level-set on what these assets are, the key accounting considerations they raise and where standard-setting is going.
What are digital and crypto assets?
There are several forms of digital assets that serve various purposes in the digital economy. Concepts in this area are not universally defined and terminology is often confusing and used interchangeably. Many digital assets have in common certain characteristics, such as the use of cryptography and blockchain technology.
Digital assets include what are commonly referred to as cryptocurrencies or crypto assets (e.g. Bitcoin, Ether, Litecoin), but also include (not exhaustive): security and utility tokens, Central Bank Digital Currencies (CBDCs), and Non Fungible Tokens (NFTs).
But to get to the right accounting, definitions and labelling are much less important than understanding the specific characteristics of the digital asset, who owns it for accounting purposes and the business purpose for owning it.
What are the typical accounting considerations for digital assets?
IFRS preparers apply the 2019 IFRS Interpretations Committee (IFRS IC) Agenda Decision1, which addresses some accounting considerations when holding cryptocurrencies. For US GAAP preparers, an AICPA Practice Aid2 provides nonauthoritative interpretive guidance on many digital asset accounting issues, such as: digital asset classification, recognition, subsequent accounting, derecognition, accounting ownership, fair value measurement, derivatives and embedded derivatives, crypto asset lending and crypto asset mining.
The accounting generally depends on the company’s business model (e.g. investors, miners or broker-traders of digital assets) and the characteristics of the digital assets (i.e. contractual terms, rights and obligations). Consensus is still forming in many areas, and many issues have not yet been addressed.
Here we provide snapshots of four of the most prevalent accounting questions that have emerged to date.
| Accounting issue | Description |
|---|
| Scoping (i.e. which existing guidance applies to digital assets?) | The approach to this question has been addressed by the 2019 IFRS IC Agenda Decision under IFRS Standards and the AICPA Practice Aid under US GAAP. A company assesses whether a digital asset meets the definitions of cash or cash equivalents, financial instruments, inventory or intangible assets.
Based on these definitions, digital assets are often considered indefinite-lived intangible assets under both IFRS Standards and US GAAP, but exceptions do exist. For example, under IFRS Standards, companies that hold digital assets for sale in the ordinary course of business classify them as inventory. This accounting model is not available under US GAAP because inventory only includes tangible items.
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| Measurement at cost or fair value | IFRS Standards offer two possible routes to a fair value measurement that are not available under US GAAP:
- The revaluation model in IAS 383 can be applied to digital assets classified as intangible assets if an active market exists; determining whether an active market exists can be challenging.
- Also, broker-traders measure their digital assets classified as inventory at fair value less cost to sell.
Otherwise, under IFRS Standards and US GAAP, digital assets classified as intangible assets are typically indefinite-lived and measured at cost less impairment losses. This opens numerous practical issues such as:
- determining cost when the asset is obtained in exchange for goods or services (see below, Revenue recognition); and
- impairment testing (and reversals of impairment losses under IFRS Standards), including fair value measurement (see below, Fair value measurement). Recoverable amounts are subject to the volatility of digital asset values.
When digital assets are classified as inventory under IFRS Standards but the entity is not a broker-trader, they are measured at the lower of cost and net realizable value under IAS 24.
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| Fair value measurement | Although some digital assets are actively traded, determining their fair value may not be straightforward. The converged fair value accounting guidance in IFRS Standards and US GAAP requires an entity to identify its principal (or most advantageous) market for the digital asset.
Judgment is often required when determining an entity’s principal market for a digital asset; common complexities include identifying which markets can be accessed by the holder and assessing whether information about/from various markets (e.g. volume of trading, prices) is reliable. Determining whether an active market exists can also be challenging.
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| Revenue recognition | Companies may receive digital assets as consideration for goods and/or services transferred. In addition, companies generally receive digital assets as payment for participating in a blockchain’s consensus protocol (e.g. engaging in mining or staking activities).
Both IFRS Standards and US GAAP require that noncash consideration generally be measured at the fair value of that consideration. An exception arises when that fair value cannot be reasonably estimated, in which case the fair value of the goods or services transferred takes precedence.
While US GAAP is clear that the fair value of the noncash consideration received in a revenue transaction or on the sale of a nonfinancial asset must be measured at contract inception, with all subsequent changes in fair value recognized outside of revenue, IFRS Standards do not specify the measurement date.
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Can we hope for more explicit accounting guidance soon?
Under IFRS Standards, likely not. The International Accounting Standards Board (IASB® Board) decided in April 2022 not to add a project on cryptocurrencies and related transactions to its 2022-2026 work plan. IASB Board Chair, Andreas Barckow, stated there was appropriate accounting for holdings of cryptocurrencies under the existing literature, and more importantly, the evidence from many of the respondents to the agenda consultation does not show that holdings of cryptocurrency are either significant or prevalent for IFRS Standards reporters in their respective jurisdictions at this stage.5 Instead, issues may be addressed indirectly through a more comprehensive project on intangible assets, though that is yet to kick off.
For US GAAP preparers, the FASB added a project to its technical agenda in May 2022 to improve the accounting for and disclosure of certain digital assets. There seems to be significant impetus to the Board’s project, but many questions about the project’s scope and outcome remain unanswered that are likely to affect how quickly new guidance is issued. Beyond standard-setting however, in March 2022 the President of the United States signed an Executive Order6 directing US federal agencies to report on crypto and digital assets and consider potential new regulations and/or legislation in this space. This increasing regulatory momentum7 has prompted the SEC to take steps in March 2022 to address how a company that has an obligation to safeguard digital assets for others should account for those digital assets.8
