In this podcast episode, we discuss the accounting for cryptocurrencies. I’m going to base the following discussion on what the International Accounting Standards Board has put out so far, because that’s all there is. And keep in mind that what’s been released is a bit sketchy, and needs to be expanded upon.
Classification as an Intangible Asset
The short answer for the appropriate accounting is to treat cryptocurrencies as an intangible asset. The main reason is that they’re not an established currency that’s recognized by a government. Instead, they’re issued by the private sector and designed to go completely around the existing monetary system. In most cases, they’re not backed by any underlying assets.
Cryptocurrency Held in the Ordinary Course of Business
In some cases, you’ll be holding a cryptocurrency for sale in the ordinary course of business. If so, you should initially record it at its purchase price, and then record gains and losses on the asset at the end of each reporting period. It’s going to be an unrealized gain or loss if you’re still holding the cryptocurrency at the end of the period, which means that it’s recorded in other comprehensive income. And, it’s going to be a realized gain or loss once you sell it, which gets recorded in earnings. At the moment, a good way to determine the month-end fair market value of your holdings is to look it up its price on coinbase.com.
Cryptocurrency Held for an Extended Period
So, what if you’re intending to hold cryptocurrency for an extended period of time? Well, this is where the accounting rules cease to exist. But, since I’ve stated that cryptocurrency is classified as an intangible asset, the most basic way to do it is to record the initial cost and then reduce it by any impairment later on. The problem is that this cost approach doesn’t allow for any increases in the value of a cryptocurrency.
The Revaluation Model
One possibility is the revaluation model, which only exists under IFRS, not GAAP. Under this model, you can revalue a cryptocurrency to its fair value in other comprehensive income, and losses directly in earnings. That approach is more fair, since you can use it to record upward swings in value.
Cryptocurrencies Issued by a Legitimate Government
So, what about a cryptocurrency that has been issued by a legitimate government? At this point, it’s barely happened. There’re a lot of countries considering it, but very few have completed more than a provisional rollout. A good example is the SandDollar, which is issued by the central bank of the Bahamas. It’s a direct liability of the central bank, and it’s backed by the country’s foreign reserves.
So, the SandDollar sounds like a currency, but at the moment it can only be used within the Bahamas. They’re still working on rolling out a feature so that you can use it to buy foreign exchange. And when it does, will it have a separate exchange rate from the Bahamian dollar? At the moment, the Bahamian dollar is pegged at a one-to-one ratio to the U.S. dollar, but would their central bank let the SandDollar float against the U.S. dollar? Who knows – these things are still being figured out.
But – on the assumption that government-back cryptocurrencies will be rolled out, then the accounting for them would be the same as for any other currency transactions you might have.
So, let’s use a mythical British cryptocurrency as an example. We’ll name it after the current prime minister, Boris Johnson, so it’s the British Boris.
A company in America enters into a transaction to pay 50,000 Borises to a London-based manufacturer in exchange for a delivery of 10,000 titanium combs. After all, the real Boris could certainly use a comb.
At the point of sale, the exchange rate is five Borises for every one U.S. dollar, so the buying company records the seller’s invoice as $10,000. Payment is due in one month. But on the payment date, the exchange rate has changed, so the buyer has to pay $11,000 in order to deliver the same 50,000 Borises to the seller. In this case, the extra $1,000 paid is recorded as a foreign currency loss.