Accounting for cryptocurrencies (IFRS® Accounting Standards vs US GAAP)

The rise in the use of cryptocurrencies in recent years and the absence of any specific IFRS Accounting Standard, has resulted in entities having to apply the hierarchy contained in IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, paragraphs 11 and 12, to develop an appropriate accounting policy for crypto assets. This involves considering, in descending order:

1. The requirements in IFRS Accounting Standards dealing with similar and related issues
2. The recognition criteria and measurement concepts in the Conceptual Framework for Financial Reporting
3. The most recent pronouncements of other standard-setting bodies that use a similar conceptual framework to develop accounting standards, other accounting literature, and accepted industry practices (to the extent these do not conflict with (a) and (b) above).

Interpretation Committee agenda decision

In June 2019, the IFRS Interpretations Committee (Committee) published an agenda decision explaining its rationale for cryptocurrencies being recognised and measured as either intangible assets or inventories. The agenda decision refers to types of crypto assets having all of the following characteristics:

• A digital or virtual currency recorded on a distributed ledger that uses cryptography for security
• Is not issued by a jurisdictional authority or other party
• A contract does not arise between the holder and another party.

The Committee concluded that such crypto assets do not meet the definition of a financial asset, nor are they cash. However, they could be inventories if held for sale in the ordinary course of business (and measured at the lower of cost and net realisable value), or if acting as a broker-trader of cryptocurrencies, measured at fair value less costs to sell. Otherwise, IAS 38 Intangible Assets applies.

Accounting under IAS 38

Accounting for cryptocurrencies under IAS 38 means:

• Entities can recognise them using the cost or revaluation model, although the latter is only permitted if they can measure fair value by reference to an active market
• When applying the revaluation model, revaluation increments will be recognised in other comprehensive income, not profit or loss
• Applying the cost model - useful lives are likely indefinite, so no amortisation is provided, but an annual impairment test is required.

Accounting under US GAAP

In December 2023, the Financial Accounting Standards Board (FASB) amended to US GAAP, ASU 2023-08.

Prior to this amendment, US GAAP generally required these cryptocurrencies to be measured as indefinite-lived intangible assets at cost less impairment losses. That is, US GAAP did not permit revaluations of cryptocurrencies unless industry-specific guidance provided otherwise.

These changes coincide with the US Securities and Exchange Commission’s approval of the listing and trading of a number of spot bitcoin exchange-traded product (ETP) shares.

Implications

Entities applying the ‘cost’ model under IAS 38 would have simultaneously complied with the US GAAP ‘cost less impairment’ model. ASU 2023-08 potentially creates significant differences between US GAAP and IAS 38 because it requires measurement at fair value, whereas entities may be applying the cost model under IAS 38. Even if Australian entities measure cryptocurrencies using the revaluation model, there will still be GAAP differences because fair value movements are recognised in other comprehensive income under IAS 38, but in profit or loss under US GAAP.

Effective date

The ASU 2023-08 amendments apply to all entities for fiscal years beginning on or after 15 December 2024. In most cases, this will impact fiscal years ending 31 December 2025 for the first time. Entities can early adopt the changes in interim and annual financial statements that still need to be issued. If they adopt them early in an interim period, they must adopt them as of the beginning of the fiscal year, which includes the interim period.

Comparatives are not restated. Instead, the entity adjusts the opening balance of retained earnings for the cumulative effect of the changes, as at the beginning of the annual reporting period in which the amendments are first adopted (usually 1 January 2025).

Need help?

Accounting for cryptocurrencies can be complex, particularly if the revaluation model is applied, and there is a need to determine fair value by reference to an active market. Please contact our IFRS & Corporate Reporting team if you need help.