Question

Case 19-6
Classification of Cryptocurrency Holdings

Software Provider (the “Company”) supports and sells computer software. The Company accepts cryptocurrencies (e.g., Bitcoin, Ether, Ripple) as payment for the sale of its computer software. The Company holds its cryptocurrencies partially for investment (e.g., expectation that they will appreciate in value) and partially to use in the future to purchase goods or services.

Cryptocurrency is a new type of value and payment method that is different from fiat currency (e.g., U.S. dollars and foreign currencies). Presently, cryptocurrencies have no government backing or recognition by a central authority as legal tender. Their value is only supported by supply and demand.

Cryptocurrencies do not have a physical form but exist as immutable distributed ledgers (electronic records) maintained on public blockchains. They are different than electronic instances of cash, such as an online bank account, in that they are not linked to a physical currency.

Bitcoin and other similar “coins” use cryptography (e.g., use of codes to secure communications) to control the security and creation of these coins, which led to the term “cryptocurrencies.”

There are other crypto-assets that are not cryptocurrencies, such as tokens. It is important to distinguish between cryptocurrencies and tokens.

Cryptocurrency is a unit of value that is native to a blockchain. It is a means of exchange within the blockchain to incentivize the network of participants to use the blockchain. The sole purpose of a cryptocurrency is for exchange of value, and it has limited functionality beyond that.

A token is a piece of business logic (i.e., “smart contract”) coded into an existing blockchain. A token can have a functionality beyond an exchange of value — it can represent any asset or functionality desired by the developer for use on a platform. Tokens may be an interest in an entity (e.g., security token), an interest in a specific asset (asset token), or a right to a future product or service (utility token).

Cryptocurrencies are usually obtained by purchasing or receiving them on a peer-to-peer basis. That is, they can be received directly from a counterparty in exchange for an asset or service or they can be purchased in exchange for a fiat currency, often from an exchange that specializes in cryptocurrencies.

For a cryptocurrency to function as a means of peer-to-peer exchange, a ledger needs to be maintained for tracking ownership of the cryptocurrency. For cryptocurrencies, this electronic ledger is maintained using blockchain. There are many copies of this ledger and many ledger keepers. Distributing the processing allows many users to each play a small part in the maintenance of the ledger system; this means that the security of the system does not rely on a few individuals.

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Case 12c: Classification of Cryptocurrency Holdings Page 2

The amount of coins for a particular cryptocurrency that are in circulation is tightly controlled. For example, for Bitcoin there is a limit on the number of coins that can exist. New Bitcoins are only created as payment to processors (called “miners”) for providing the service of validating and distributing an electronic ledger of these transactions to those involved in maintaining the blockchain.

Required:

1. How should the Company’s holdings of cryptocurrency be classified in the statement of financial position under U.S. GAAP and IFRS® Standards?

2. How should the holdings of cryptocurrency be initially and subsequently measured under U.S. GAAP and IFRS Standards?

Answer 1

What is Crypto Assets – Its represents digital assets . Crypto currency such as bitcon and ether is the best example of crypto assets Other than this two , other alternatives are Bitcoin Cash , Ripple , litecoin etc.

Crypto currency commonly term as Token . Initial Coin Offering represents issue of new coins recorded on a distributed ledger ( virtually always Ethereum) . An ICO represents an attractive source of financing for a start up business . As it managed cost , time and discomfort involved in obtaining finance through traditional means such as banks , venture Capitalist or stock market .

Securities on a Block Chain –

IFRS Treatment

Crypto assets constitute an evolving , facts growing but still relatively new asset class. Due to so many innovation involved in this matter , it is difficult to draw any generally acceptable accounting treatment

As per current standard , Digital currency is not a financial Instrument due to lack of contractual relationship . Whether Digital currency should be treated as “ Intangible assets” ? as per IAS 38 Intangible assets mean, digital currency is a non monetary asset without physical substance Or it should be treated as Inventory ( under IAS 2.)

Crypto currency cannot be disclosed under IAS 7 “ Cash and Acsh Equivalent because they are significantly volatile in nature

Trust me there is lack of guidance at present on digital currencies As per Exposure draft Virtual currencies at market price at the Balance sheet date if there is an active market . Any difference in Carrying value and Market price – need to account as Gain/ Loss

In case active market is not available , then we need to go with disposal approach . it will measure at lower of the cost or estimated disposal value . loss recognised can not be reversal subsequently

Dealer of Virtual currency need to recognised as an asset and made an agreement with customer Dealer is required to recognised the obligation to return the virtual currency to the customer as a Liability    

  US GAAP – As per IFRS , there is no specific accounting standard relates to Crypto currency under US GAAP . Under US GAAP , may be this one is treated as Indefinite period of Intangible assets.

Cryptocurrency is not treated as cash – it is an exchange medium. It is not represents any legal tender or backed by Sovereign Fund . Crypto currency can not easily convertible into cash

As mentioned above , cryptocurrency may be tested for Impairment due to Indefinite period of Intangible assets

Crypto  currency may be treated as Inventory ( same like Broker holds Inventory)

At present , Under IFRS + US GAAP - no specific standard applicable for Cryptocurrency .Above we have seen that this currency is not falling under IAS 7 ( mainly due to high volatility and can not convert easily in cash ) , can not be treated as Debt or Equity and accounted under FVTPL ( Fair value through PNL) , We can most probable treated this currency under Intangible asset ( indefinite period ) or under Inventory method . As per IFRS , IASB board do market price and carry value adjustment and transfer gain / loss in to PL .