Clarity needed in crypto-assets accounting

By Dr Jana Schmitz

Recent years have seen a significant growth in the number and type of crypto-assets. Developed and based entirely on digital technologies to represent economic value, crypto-assets continue to diversify and evolve rapidly.

This is in line with ongoing structural transformations in technology and reflects preferences and usage by investors and consumers.

There is no present legal or commonly accepted definition of the terms “crypto-assets” and “crypto-liabilities”.

In its discussion paper proposing accounting requirements for crypto-assets and liabilities, the European Financial Reporting Advisory Group (EFRAG) defines a crypto-asset as a “digital representation of value or contractual rights created, transferred and stored on some type of distributed ledger technology network (e.g. blockchain) and authenticated through cryptography”.

EFRAG also suggests crypto-liabilities be defined as “obligations that arise from the issuance of crypto-assets resulting in a present obligation for the issuing entity to transfer or grant access to an economic resource in digital or non-digital form”.

These definitions encompass privately issued crypto-assets and liabilities such as cryptocurrency, tokens or stablecoins (ASIC, 2021), as well as central bank digital currencies (CBDCs).

In March 2019, the International Financial Reporting Standards (IFRS) Interpretations Committee (IC) discussed accounting for cryptocurrencies, which represent a significant proportion of the overall crypto-assets by market capitalisation, addressing the ongoing evolution, growth potential and diversity of crypto-assets.

Subsequently, in June 2019 the IFRS IC issued an agenda decision clarifying the appropriate IFRS-based accounting treatment for cryptocurrencies.

The IFRS IC concluded that holdings of cryptocurrencies should be accounted for under IAS 38 Intangible Assets, unless they are held for sale in the ordinary course of business, in which case IAS 2 Inventories would apply.

While some stakeholders consider the IFRS IC clarification to be sufficient at present, others have called for further clarification and development of IFRS requirements for crypto-assets and liabilities.

The International Accounting Standards Board (IASB) Staff Paper from November 2019 highlights the fact that, on a global basis, only a small number of large IFRS reporting companies have reported crypto-assets and related activities.

Although the IASB paper confirms that crypto-assets holdings among IFRS companies were insignificant in 2019, it acknowledged significant future potential for their increased uptake as the result of innovative market development (e.g. the rollout of stablecoins and launch of CBDCs), ongoing growth of blockchain-based and crypto-economic business models, and enhancements to regulatory requirements and oversight.

Recent corporate investments into Bitcoin by Tesla, as well as Morgan Stanley’s announcement it will offer certain clients access to Bitcoin funds, are already hinting at increasing institutional investment activity.

The Reserve Bank of Australia also recently partnered with Commonwealth Bank, National Australia Bank, Perpetual and blockchain technology company ConsenSys Software to conduct a research project exploring the potential use and implications of a wholesale CBDC using distributed ledger technology.

Further, Jerome Powell, chair of the Federal Reserve, announced that the Federal Reserve plans to publish a discussion paper that will explore the implications of fast-evolving technology for digital payments, with a particular focus on the possibility of issuing a US CBDC.

Such developments emphasise the ongoing relevance of establishing accounting requirements for the current and next generation of crypto-assets. EFRAG’s discussion paper sets out the following possible options for developing IFRS requirements addressing crypto-assets and liabilities:

Option 1 – No amendments to current IFRS standards: Preparers would continue to apply existing IFRS, including having to develop their own accounting policy (IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors).

Option 2 – Amendments and/or clarifications to current IFRS standards: Several amendments or clarification guidances would be made to current IFRS Standards for the accounting by holders and issuers of crypto-assets and liabilities.

Option 3 – Development of a new IFRS standard to address crypto-assets and liabilities: A new stand-alone IFRS Standard for crypto-assets and liabilities would be developed on the premise that they are unique.

The new standard could address the multiple issues on different topics related to crypto-assets and liabilities.

When Accounting Standards Advisory Forum members were asked about their opinion of the EFRAG paper in December 2020, each of the three options above found supporters among the standard-setters.

While standard-setters continue to debate the best way forward, different forms of crypto-asset classes, such as non-fungible tokens (NFTs), continue to emerge.

With new crypto-assets increasingly overlapping with real-world physical assets and attracting significant institutional investment, they will be appearing in financial statements with increasing frequency.

“Today, crypto-assets have a market cap in excess of US$1.6 trillion [A$2 trillion at the time of writing],” says Andrew Hunter, CEO of CPA Australia.

“Looking ahead, we may well see crypto-assets define themselves as an integral medium of exchange or a store of value in the financial system.

“For this reason, it is important to agree on clear accounting and reporting requirements and for auditors to carefully consider how to audit these assets.”