Cryptocurrency and Accounting
A Challenge in Concept, An Evolution in Technology
Bitcoin price hits X USD…
ETH price crashes to Y USD…
Almost everyone was interested for a while to follow the news about cryptocurrencies, and thought maybe about buying them, because betting on them became a trend and a game of high risk regarding their high volatility.
But behind the risk of the trading activity which is in finance language defined as the Front Office point of view, there is the challenge for the accounting activity defined as the Back Office point of view.
In this article we will discuss how Cryptocurrencies introduced a Challenge for Accounting standards but also an Evolution of the Accounting system.
How we can define the cryptocurrency in a simple way?
Cryptocurrency is any form of currency that only exists digitally, that usually has no central issuing or regulating authority but instead uses a decentralized system to record transactions and manage the issuance of new units, and that relies on cryptography to prevent counterfeiting and fraudulent transactions.
The cryptocurrency, with its new model introduced a Challenge for the accounting standards.
Can we account the cryptocurrency as Cash or Cash equivalent?
Being a digital form of money, we might firstly think that cryptocurrency should be accounted as Cash or Cash equivalent.
However, in the accounting standards “Cash equivalents” is defined as “short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value”.
Cryptocurrency has a high price volatility and is still not accepted as medium of exchange by all the entities. (It is the call of an entity to accept or not the cryptocurrency as a way of payment)
Thus, it cannot be accounted as Cash or Cash equivalent.
Can we account the cryptocurrency as financial asset at fair value through profit or loss (FVTPL)?
Cryptocurrency does not represent a debt security or an equity security (It doesn’t represent an ownership in an entity).
Thus, it cannot be accounted as financial asset.
Can we account the cryptocurrency as Intangible asset?
As defined in IAS 38, an intangible asset is an identifiable non-monetary asset without physical substance. 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.
Thus, the most appropriate accounting classification of cryptocurrency is Intangible asset.
As defined in IAS 38, accounting of intangible assets consists of recording the asset as long-term asset and amortize the asset over its useful life. Useful life refers to the time period over which an asset is expected to enhance future cash flows. If Useful life is indefinite, no initial amortization is done, but a review of the asset at regular intervals to see if a useful life can be determined.
As presented above, the introduction of Digital money to the market with their nontraditional model introduced some challenges for the accounting standards.
But these newcomers will also introduce an Evolution in the accounting technologies.
Because behind the Bitcoin, the Ethereum… and all cryptocurrencies comes the Blockchain technology.
Without going into the technical details about blockchain, we can assure that this evolution will benefit accountants by automating transactions with less errors and will increase the trust with less Fraud.
So, let’s always look at the Bright side and get ready to take advantage of the new technologies.