Whilst we are awaiting the current review of FRS 102 we have to use our judgement and find the best accounting fit that we can for cryptocurrencies as they are not specifically represented in FRS 102 at present.
So, what exactly is cryptocurrency and how do we account for it?
Is it cash?
No. Although we may consider cryptocurrencies to be likened to cash, they are not legal tender and do not meet the FRS 102 definition of:
Cash on hand and demand deposits and short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value.
Is it a financial instrument?
No. In some cases cryptocurrencies can be accepted in exchange for goods however as we have seen above, they are not cash and they do not give a right to cash either. This would result in a failing of the FRS 102 benchmark for financial instruments:
A contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
Is it inventory?
Maybe. Inventory includes items which are held for onward sale, so depending on how the business plans to use the cryptocurrency, it could fall within this bracket. For example, if the business is going to buy and sale cryptocurrency on a frequent basis so that it is trading cryptocurrency as part of the ordinary course of the business then inventory would be the correct classification.
If this is the case the cryptocurrency would be held at the lower of:
- Cost (the value of money initially exchanged for the cryptocurrency); and
- estimated selling price (the value at which it will be sold which is likely to be based on current market prices) less costs to complete and sell.
Presentation would then be within the current assets section of the balance sheet as inventory. The balance sheet note to inventories in the financial statements would then show the breakdown of inventories which would include cryptocurrency.
What if I am not trading in cryptocurrency?
If inventory is not the correct classification due to the way in which the business uses cryptocurrency then classification as an intangible asset is likely to be the best fit.
This is due to the FRS 102 definition of an intangible asset which is:
An identifiable non-monetary asset without physical substance. Such an asset is identifiable when:
(a) it is separable, or
(b) it arises from contractual or other legal rights.
Cryptocurrency would meet the definition above as it is not physically present and it is separable from the business due to it being capable of being sold on an exchange or in some cases being used in exchange for goods.
The measurement basis for cryptocurrency when being held as an intangible is either:
- cost (again being the value of money initially exchanged for the cryptocurrency), with amortisation and impairment being applied; or
- revaluation, being fair value less amortisation and impairment.
Before making the decision as to which is most appropriate, reference should be made to FRS 102 section 18.18, which enables intangible assets to be revalued only if fair value can be determined from an active market, which:
- contains items which are homogeneous,
- has willing buyers at any time; and
- publicly available prices.
This is possible to achieve for some cryptocurrencies but not necessarily all.
There are also two options for the balance sheet presentation.
- Option 1 is to hold the intangible as a fixed asset; and
- Option 2 is to hold the intangible as a fixed asset investment.
Both are equally as acceptable under the Companies Act, the decision should be led by the way in which the business intends to use the cryptocurrency going forwards
How do I disclose this in the financial statements?
A clear accounting policy will be required for which ever classification of cryptocurrency is decided. The accounting policy should clearly set out:
- the point at which the cryptocurrency is recognised in the financial statements,
- the initial measurement basis, and
- the subsequent measurement basis.
All further disclosures should be in line with FRS 102 section 13 Inventories or section 18 Intangible assets as appropriate. Additional disclosure should also be provided in order to ensure that a true and fair view is given.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.