ACCOUNTING FOR CRYPTOCURRENCY

In June, 2019 the IFRIC decided on
the interesting issue of accounting for cryptocurrency. The IFRIC applies to
cryptocurrency that has the following characteristics:

i.   a
digital or virtual currency recorded on a distributed ledger that uses
cryptography for security;

ii.   not
issued by a jurisdictional authority or other party; and

iii.  does not give rise to a contract between the holder and another
party.

Ind AS 38 Intangible Assets
applies in accounting for all intangible assets except:

a. those that are within the scope
of another Standard;

b. financial assets, as defined in
Ind AS 32 Financial Instruments: Presentation;

c. the recognition and measurement
of exploration and evaluation assets; and

d. expenditure on the development and extraction of minerals, oil, natural
gas and similar non-regenerative resources.

A financial asset is any asset that
is: (a) cash; (b) an equity instrument of another entity; (c) a contractual
right to receive cash or another financial asset from another entity; (d) a
contractual right to exchange financial assets or financial liabilities with
another entity under particular conditions; or (e) a particular contract that
will or may be settled in the entity’s own equity instruments.

Cash is a financial asset because
it represents the medium of exchange and is therefore the basis on which all
transactions are measured and recognised in financial statements. A deposit of
cash with a bank or similar financial institution is a financial asset because
it represents the contractual right of the depositor to obtain cash from the
institution or to draw a cheque or similar instrument against the balance in
favour of a creditor in payment of a financial liability. Consequently, cash is
expected to be used as a medium of exchange (i.e. used in exchange for goods or
services) and as the monetary unit in pricing goods or services to such an
extent that it would be the basis on which all transactions are measured and
recognised in financial statements.

Though some cryptocurrencies can be
used in exchange for goods or services, they are not used to such an extent
that it would be the basis on which all transactions are measured and
recognised in financial statements. Consequently, in the present times
cryptocurrency is not cash. Neither is a cryptocurrency an equity
instrument of another entity. It does not give rise to a contractual right for
the holder and it is not a contract that will or may be settled in the holder’s
own equity instruments.

Ind AS 2 Inventories applies
to inventories of intangible assets. Paragraph 6 of that Standard defines
inventories as assets:

1.  held
for sale in the ordinary course of business;

2.  in
the process of production for such sale; or

3.  in
the form of materials or supplies to be consumed in the production process or
in the rendering of services.

If an entity holds cryptocurrencies
for sale in the ordinary course of business, the general requirements of Ind AS
2 apply to that holding. However, a broker-trader of cryptocurrencies, who buys
or sells commodities for others or on their own account, will measure their
inventories at fair value less cost to sell [Ind AS 2.3(b)].

IFRIC CONCLUSION

Paragraph 8 of Ind AS 38 defines an
intangible asset as ‘an identifiable non-monetary asset without physical substance’.
Paragraph 12 of Ind AS 38 states that an asset is identifiable if it is
separable or arises from contractual or other legal rights. An asset is
separable if it ‘is capable of being separated or divided from the entity and
sold, transferred, licensed, rented or exchanged, either individually or
together with a related contract, identifiable asset or liability’. Paragraph
16 of Ind AS 21 The Effects of Changes in Foreign Exchange Rates states
that ‘the essential feature of a non-monetary item is the absence of a right to
receive (or an obligation to deliver) a fixed or determinable number of units
of currency’. IFRIC concluded that a holding of cryptocurrency meets the
definition of an intangible asset in Ind AS 38 because (a) it is capable of being
separated from the holder and sold or transferred individually; and (b) it does
not give the holder a right to receive a fixed or determinable number of units
of currency. IFRIC also concluded that Ind AS 2 applies to cryptocurrencies
when they are held for sale in the ordinary course of business. If Ind AS 2 is
not applicable, an entity applies Ind AS 38 to holdings of cryptocurrencies.

In addition to other disclosures
required by Ind AS Standards, an entity is required to disclose any additional
information that is relevant to an understanding of its financial statements
(paragraph 112 of Ind AS 1 Presentation of Financial Statements). An
entity provides the disclosures required by (i) paragraphs 36–39 of Ind AS 2
for cryptocurrencies held for sale in the ordinary course of business; and
(ii) paragraphs 118–128 of Ind AS 38 for holdings of cryptocurrencies to which
it applies Ind AS 38. If an entity measures holdings of cryptocurrencies at
fair value, paragraphs 91–99 of Ind AS 113 Fair Value Measurement
specify applicable disclosure requirements.

Applying paragraph 122 of Ind AS 1,
an entity discloses judgements that its management has made regarding its
accounting for holdings of cryptocurrencies if those are part of the judgements
that had the most significant effect on the amounts recognised in the financial
statements. Paragraph 21 of Ind AS 10 Events after the Reporting Period
requires an entity to disclose details of any material non-adjusting events,
including information about the nature of the event and an estimate of its
financial effect (or a statement that such an estimate cannot be made). For
example, an entity holding cryptocurrencies would consider whether changes in
the fair value of those holdings after the reporting period are of such significance
that non-disclosure could influence the economic decisions that users of
financial statements make on the basis of the financial statements.  

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