Analysis by Christos Antonopoulos and Dionysis Stamiris

The business community, and society at large, is continuously seeking new, innovative, efficient (and even untraceable) ways of conducting activities without the intermediation of Central Banks. In the drive to reduce the time and cost of transactions, the last decade has led us to the creation of a new form of money: cryptocurrencies. Their use is steadily increasing, and this article examines their treatment from an accounting perspective, primarily under International Financial Reporting Standards (IFRS), where global guidance remains insufficient. While typing the word ‘Bitcoin’ into Google today yields 707 million results, the accounting principles of most countries opt for a kind of… deafening silence, further muddying an already opaque picture.

Introduction to Cryptocurrencies

Cryptocurrencies are a decentralised electronic form of money operating through a peer-to-peer network that allows two or more computers to share resources on an equal basis. They are based on the principles of cryptography to secure the network and verify transactions. Most cryptocurrencies use a distributed database as the backbone of their system, the so-called Blockchain. This enables transactions to take place without the intervention of a central authority such as a bank. The most well-known cryptocurrency in the world is Bitcoin, which was introduced in 2009. Due to the nature of its software, many developers were permitted to experiment with and modify its code (forking), leading to the creation of a plethora of new cryptocurrencies incorporating improvements such as faster transactions and greater anonymity. The key characteristic of cryptocurrency is its decentralised nature and, through this, its resistance to any attempt at control or interference.

It is worth noting that although the use of cryptocurrencies, both by individuals and businesses, has become widespread, questions remain regarding their legal status and tax treatment. Their total value currently exceeds USD 250 billion, with the American giant Tesla recently announcing that it now accepts payments in Bitcoin.

What Are the Accounting Classification Options for Cryptocurrencies?

Cryptocurrencies constitute assets, given that an asset is by definition a resource controlled by an entity as a result of past events, has monetary value, and is expected to provide economic and other benefits when utilised.

The following table summarises the findings of the analysis:

Cash and Cash Equivalents

As a form of ‘electronic money’, the first category one might consider for classification would be cash and cash equivalents. Cash exists in the form of banknotes or coins and is issued and backed by a government as legal tender. Digital currencies do not peg their value to gold, are not issued by a central bank, nor are they backed by any government. Consequently, they cannot be considered cash under IFRS. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and subject to an insignificant risk of changes in value. Cryptocurrencies have no maturity date and are subject to significant risk of changes in value (extremely high price volatility). Therefore, the definition of cash equivalents does not appear to cover them either.

Financial Instruments at Fair Value Through Profit or Loss

Another logical potential approach to the accounting treatment of cryptocurrencies would be to present them as financial assets at fair value through profit or loss. Such an approach would, after all, align with the investment nature of cryptocurrencies and their high volatility. For this to be possible, cryptocurrencies would need to meet the definition of a financial instrument as defined in IAS 32 ‘Financial Instruments: Presentation’. Cryptocurrencies are not financial instruments under IFRS because they do not represent cash or a contract establishing a right or obligation to deliver or receive cash or another financial instrument. This category is therefore also excluded.

Intangible Assets

Cryptocurrencies appear to be classifiable as intangible assets under IAS 38, which defines intangible assets as non-monetary assets without physical substance. Digital currencies are: (a) without physical substance; (b) separately identifiable; and (c) non-monetary, since they do not meet the definition of money/cash. Consequently, they appear to satisfy the definition of intangible assets. The global accounting community accepts classification as intangibles as the most appropriate in most cases.

Strikingly, there are currently no accounting rules for the recognition and measurement of cryptocurrencies, whether under Greek GAAP, IFRS, or US GAAP, despite the widespread proliferation of cryptocurrency use in recent years. The majority of the financial world supports the view that the most accurate representation of a digital currency in financial statements would be at fair value.

Greek Legislation

The latest and sole opinion issued by the Greek Accounting Standards Board (SLOTT, ref. 104/27.02.2018) largely aligns with the above IFRS analysis on the accounting treatment of cryptocurrencies. More specifically, it states that they may be accounted for as follows: as inventory, if intended for sale in the ordinary course of business (measured at cost); or as an intangible asset, if held as an investment (under IFRS: either at amortised cost or fair value; under Greek GAAP: at amortised cost). In all cases, extensive disclosure of the accounting policies applied and adequate justification of the choices made are required in the notes to the financial statements.

In Conclusion

According to UHY Axon Partner Christos Antonopoulos: ‘The use of cryptocurrencies is fundamentally different from both the use of intangible assets and inventories. At present, they are a purely investment instrument that should be measured at fair value through profit or loss, despite the fact that, as analysed from various sources, they do not fall within the IFRS definition of a financial instrument. Even if the revaluation model is adopted as an intangible asset, the accounting monitoring challenges are many, the foremost being how movements (purchases and sales) during the period will be tracked and how results will be presented as other comprehensive income within Equity.’

Furthermore, Dionysis Stamiris, Certified Auditor at UHY Axon, considers that there is a significant delay on the part of the relevant accounting standard-setting bodies in taking a clearer position on such a ‘hot topic’ and emphasises: ‘Accounting for cryptocurrencies under the cost model has limited value, while under the revaluation model it can prove complex without substance. We would encourage accounting authorities to take a clearer stance on the matter, even if it requires the redefining of deeply established accounting definitions.’

The economy and the nature of transactions has always been inherently dynamic, from antiquity to the present day. For accounting to hold value for the user, it must be equally dynamic, contemporary, and must keep pace rapidly with the economic and technological developments of our era. As our Nobel Prize-winning national poet Elytis once wrote: ‘Leap faster than decay.’