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How Should Cryptocurrencies Be Accounted in the Financial Statements

With its meteoric rises and precipitous falls over the last few months, Bitcoin, a well-known crypto-currency, has shocked the world. Bitcoin is currently mostly traded by individuals and some speculative funds, but it won't be surprised if it begins to appear on companies' balance sheets. Now you must be wondering, what are the accounting implications of Bitcoins? Is it an intangible asset, a cash balance, or something else? This article will shed some light on the mysterious accounting phenomenon of cryptocurrencies.

What is a Crypto-asset?

Crypto means secret or concealed, so a crypto-currency is actually a secret currency. In technical terms, a cryptocurrency is a decentralized, digital currency without a physical structure.

After the currency is issued, it is decentralized, which means it has no central control authority. In contrast to conventional ledgers, which record transactions on one computer, ‘blockchain’ technology uses distributed ledgers, which are accounting ledgers that record transactions on multiple computers. Transactions are encrypted at all times.

There are many different cryptocurrencies, including Bitcoin, Ethereum, Bulldog, and Litecoin. This year, Facebook plans to introduce its own cryptocurrency, Diem.

Accounting Nature of Crypto-assets

Cryptocurrencies are generally classified as assets by investors because they are resources that they control and they may be able to receive future economic benefits from consuming or redistributing them. Crypto assets, generally referred to as crypto-currencies and related assets, are governed by a variety of conditions and terms.  Crypto-asset holders may be entitled to receive goods or services upon redemption, while other crypto-asset holders may be able to trade them online using a specialized platform.

Accounting For Cryptocurrencies is treated differently, by auditors in Dubai, depending on their purpose. Different parties may have different purposes for holding crypto-assets, for instance, the issuer of the crypto-currency may view the crypto-currency created as inventory. Upon issue, holders of crypto-assets can treat these assets as cash if they use them as a currency to purchase goods or services or for trading. Their use primarily defines how they are going to be accounted for by the audit firms in Dubai.

As crypto-assets often have very difficult terms and conditions, the holder needs to evaluate their terms and conditions carefully in order to determine which IFRS/IAS applies. Depending on the standard that applies, the holder may also need to access its business model in determining the appropriate accounting.

Accordingly. Following accounting, treatment can be considered for crypto-assets to decide recognition measurement.

  • Cash & cash equivalent
  • Financial Instruments (IFRS 9)
  • Inventories (IAS 2)
  • Prepayment assets
  • Intangible assets
  • Developing an accounting policy under IAS 8

Read More : Impact of BlockChain on the Audit Function and Financial Reporting

Cryptocurrency Accounting Treatment as Per IAS and IFRS Standards

According to IFRS IC, IAS 2 applies when cryptocurrency is held for sale in the ordinary course of business.

  • Physical inventories are not required by IAS 2, but assets that are held for sale in the ordinary course of business should constitute inventory.
  • According to paragraph 9 of IAS 2, the entity would measure cryptocurrencies held for the purpose of resale by applying the lower cost or net realizable value, subject to the commodity broker-trader exemption contained in paragraph 3(b) of IAS 2.
  • The Intangible Assets Standard (IAS 38) applies to cryptocurrency holdings.
  • IAS 32 Financial Instruments connect currency and cash.
  • According to IAS 1 (Presentation of Financial Statements), entities need to disclose judgments made by their management pertaining to the accounting of crypto assets they hold. The amount recognized in the financial statements was most significantly impacted if they were included in the judgment.
  • The Fair Value Measurement (IFRS 13) specifies the disclosure requirements for entities holding cryptocurrency at fair market value with fewer costs to selling. They have the choice to measure their crypto-assets inventories at fair value and less cost to sell.
  • In accordance with IAS, IFRS IC defines financial assets. Cryptocurrency does not qualify as a financial asset, since it is neither a cash nor equity instrument of another entity. According to IFRS IC, simply holding cryptocurrency does not constitute cash, as cryptocurrency lacks the characteristics of cash.
  • IFRS 15 states that when a performance obligation is met, revenue will be recognized after identifying the contract with the customer and identifying the performance obligations therein.
  • In accordance with IFRS 9, Cryptocurrencies are not securities, they are neither debt securities nor contracts that establish a right to deliver or receive money or other financial instruments. Cryptocurrencies appear to be regarded as financial assets.
  • Where no other standard applies and an entity develops its own accounting policy for crypto-assets held under the IAS 8 hierarchy.

Difficulties Encountered in Bookkeeping Treatment or Accounting for Cryptographic Resources

  1. As the cryptographic assets domain is one that is rapidly advancing, everyone referred to in this will be aware of the latest developments around here to stay abreast of any upcoming developments.
  2. When crossing cryptographic resources, you may find a mixture of various characteristics, making it difficult to ensure bookkeeping accuracy.
  3. It is difficult to conclude a fair price for crypto resources due to the instability of their costs
  4. IFRS assessment may not provide an advisory regarding how to classify and account for cryptographic assets, so customers should observe the overall accounting regulations and guidelines.

Opt for Top Audit Firms in Dubai for Crypto-accounting

Due to their inherent nature and structure, cryptographic resources require topic knowledge to be able to apply and adhere to bookkeeping strategies reliably. With an expert team of internal and external auditors, Farahat and Co have been providing solutions to complex bookkeeping issues in UAE for years.

To record and manage your Cryptographic assets or any related business, we can offer you value-added auditing services in Dubai. To smooth out your accounting practices, we can offer you the best practices and suggestions based on your company's administrative requirements.

Read More : Auditing Digital Assets in Dubai

Ervee is a CPA with international experience in Tax and Accounting. He has over 12 years of experience in accounting and bookkeeping and over a year in VAT implementation, registration, and accounting in UAE. He regularly drives out inefficiencies in company operations and loves the challenge of helping clients find additional ways for an easier and improved compliance and verification of transactions.