Update

Cryptographic assets


David Baur

Director and Leader Accounting Consulting Services

Neither IFRS nor the Swiss Code of Obligations currently contain specific guidance on accounting for cryptocurrencies. Preparers need to analyse the business rationale for holding cryptocurrencies and follow the principles of the standards to determine the right accounting treatment.

Just over a year ago, in December 2017, one bitcoin was trading for around USD 20,000. Since then, bitcoin and many other cryptocurrencies have fallen dramatically in value. While some observers see in this decline in the value of key cryptocurrencies the end of all cryptocurrencies, others are convinced that we’re only at the beginning of an era of major developments in cryptographic assets based on distributed ledger technology.


Classification

There is currently no legal definition of cryptographic assets. Generally, cryptographic assets are transferrable digital representations that are designed in a way that prevents their copying or duplication. Cryptographic assets and the underlying blockchain technology provide opportunities to digitise a variety of ‘real world’ objects. There are various types of cryptographic assets, the most commonly known subset of which is cryptocurrencies. These are mainly used as a means of exchange, and share some characteristics with traditional currencies. The most prominent cryptocurrencies are bitcoin, XRP and ether.

For accounting purposes it’s useful to classify cryptographic assets into similar types which should be accounted for in a similar way. The two most relevant characteristics for classifying cryptographic assets for accounting purposes are:

  • The primary purpose of the asset
  • How the asset derives its inherent value. 

Based on these characteristics, the following four subsets of cryptographic assets can be defined:

Subset Purpose Inherent Value
Cryptocurrency Cryptocurrencies such as Bitcoin operate independently of a central bank and are intended to function as a medium of exchange. None - derives its value based on supply and demand.
Asset-backed Token An asset-backed token derives its value from something that does not exist on the blockchain but instead is a representation of ownership of a physical asset (for example gold or oil). Derives its value based on the underlying asset.
Utility Token Utility tokens provide users with access to a product or service and derive their value from that right. Utility tokens give holders no ownership in a company's platform or assets and are not primarily used as a medium of exchange. Value is derived from the demand for the issuer's service or product.
Security Token Security tokens are similar in nature to traditional securities. They can provide an economic stake in a legal entity: a right to receive cash or another financial asset, the ability to vote in company decisions and/or a residual interest in the entity. Value is derived from the success of the entity.

IFRS treatment

There is no standard specifically dealing with accounting for cryptographic assets in IFRS. In July 2018, the IASB asked the Interpretation Committee to analyse how an entity might apply existing IFRS standards in accounting for holdings of cryptocurrencies. The committee concluded that cryptocurrencies do not meet the definition of cash or cash equivalent. Cryptocurrencies lack some of the common characteristics of cash: they’re not legal tender and generally aren’t issued or backed by any government. While they may be accepted as means of payment for goods or services, they’re not directly related to the setting of prices for goods or services in an economy. Cryptocurrencies also fail to qualify as a financial asset (other than cash) as they typically don’t give the holder a contractual right to receive cash or another financial asset. Another consideration is that they do not come into existence as a result of a contractual relationship.

Entities that trade cryptocurrencies as part of their ordinary business activities would likely apply IAS 2 Inventories. If the entity determines on the basis of its business model that inventory accounting is appropriate, it would typically measure inventories at the lower of cost and net realisable value. An entity that holds cryptocurrencies to sell them in the near future, generating a profit from fluctuations in prices or trader’s margin, might apply the commodity broker-trader exception in IAS 2. Such inventory would be measured at fair value less cost to sell with changes in fair value recognised in profit or loss.

If a cryptocurrency does not meet the definition of inventory, it will be accounted for as an intangible asset as per IAS 38.

The table below summarises the different possible classifications and associated measurement considerations for cryptocurrencies held by an entity:

Applicable standard Initial measurement Subsequent measurement Movements in carrying amount
Inventory (IAS 2) Cost Lower of cost and net realisable value Movements above cost - N/A Movements below cost - Profit and loss
Inventory (IAS 2) - Commodity broker - trader exception Cost Fair value less
costs to sell
Profit and loss
Intangible assets (IAS 38) - Revaluation model (accounting policy choice but requires existence of active market) Cost Fair value less any accumulated amortisation and impairment* Movements above cost - Other comprehensive income Movements below cost - Profit and loss
Intangible assets (IAS 38) Cost Cost less any accumulated amortisation and impairment* Movements above cost - N/A Movements below cost - Profit and loss

* in most cases, no amortisation is expected for cryptocurrencies

Determining the correct accounting treatment also requires an analysis of the relevant characteristics of cryptographic assets other than cryptocurrencies. These cryptographic assets include security tokens, asset-backed tokens and utility tokens.

  • Asset-backed tokens may give the holder a right to an underlying asset. These tokens may be used to transfer the ownership of underlying assets without physically moving them. They are a means of transacting the underlying asset at minimal cost. This means that in these cases, accounting will likely be driven by the nature of the underlying asset and the relevant accounting standard.
  • Utility tokens usually give the holder a right to future goods or services. These tokens are a prepayment for goods or services. A prepayment for goods or services might meet the definition of an intangible asset and IAS 38 could be applied. Where it does not meet the definition of an intangible asset, a utility token is accounted for in a similar way to other prepaid assets.
  • Security tokens may give the holder a right to cash, based on the platform’s future profits or a residual interest in the net assets. Such rights may be discretionary or mandatory, and may be accompanied by the ability to vote to impact decisions relating to the underlying platform. A contractual right to cash or another financial asset may exist in these circumstances, in which case these security tokens meet the definition of a financial asset subject to IFRS 9.

Crypto tokens exhibiting elements of two or more subclasses require further analysis, and judgement is required to determine the applicable accounting treatment. Factors to consider will include the interaction of contractual clauses, and their substance and relevance in the context of the overall characteristics of the token.

Possible standard setting

Several members of the Interpretation Committee raised concerns that applying the intangible asset standard IAS 38 to holdings of cryptocurrencies does not result in providing useful information. They were of the opinion that neither the cost model nor the revaluation model – which recognises increases in the fair value in OCI (other comprehensive income) – is ideal for cryptocurrencies. These members of the committee see cryptocurrencies as speculative investments, and support the view that fair value through profit or loss would provide the most useful information.

The IASB has considered a number of ways of best addressing accounting for cryptocurrencies. The options include taking on a project to develop a specific standard, removing cryptocurrencies from the scope of IAS 38, or deferring any standard setting activity.

In its meeting in November 2018, the IASB noted that transactions involving cryptocurrencies are an emerging area, and that while holding cryptocurrencies is not currently prevalent among IFRS reporters, it could become so in the future − potentially even quite quickly. The Board concluded that for the time being, holdings of cryptocurrencies are not to be given higher priority than other projects on the work plan or in the research pipeline, and therefore decided not to add any project related to crypto assets to its agenda. The Board also decided to ask the Interpretation Committee to consider publishing an agenda decision that would explain how entities should apply existing IFRS standards to holdings of cryptocurrencies. Such an agenda decision could help limit diversity in practice.

Swiss Code of Obligations treatment

The accounting treatment under the Swiss Code of Obligations (Swiss CO) of bitcoin – currently the most significant cryptocurrency – is addressed in a Q&A published by EXPERTSuisse. The solution provided in the Q&A is not dissimilar to the accounting treatment under IFRS described above. EXPERTSuisse also concluded that it would not be appropriate to classify bitcoin as cash.

Similar to the argument under IFRS, classification as inventory may be appropriate under Swiss CO for entities (e.g. brokers) that trade significant amounts of bitcoin as part of their ordinary activity.

Unlike IFRS, classifying bitcoin as an intangible asset under Swiss CO is not the only acceptable solution when classification as inventory is not deemed acceptable. Bitcoin meets the criteria for an intangible asset. However, the Q&A concludes that the nature of bitcoin is not that of an intangible asset, and that treatment as an investment is more appropriate (although treatment as an intangible asset is also justifiable).

Even though bitcoin doesn’t meet the definition of ‘negotiable security’ (‘Wertpapier’), classification as an investment is possible. The rationale is that the accounting term ‘investment’ (‘Wertschriften’) as described in the Swiss Audit Manual is wider, also including gold, other precious metals and commodities, and is therefore considered sufficiently broad to also accommodate bitcoin. Under this caption, presentation as a current asset is appropriate if the intention is to hold bitcoins for a short period of time only, but not to trade in bitcoin as part of the ordinary activity of the entity. A non-current presentation is appropriate if the intention is to hold bitcoin for an extended period of time.

Regardless of whether bitcoin is classified as an investment, inventory or intangible asset, the cryptocurrency may be measured in Swiss CO accounts either at cost less impairment, or at an observable market price in an active market in accordance with Art. 960b.

To sum up

Under both IFRS and the Swiss Code of Obligations, the accounting treatment of cryptocurrencies held by an entity depends on the entity’s business model. If the business model does not permit classification as inventory, the residual category in the Swiss Code of Obligations can be ‘investments’, with fair value movements recognised in profit or loss if there is an observable market price in an active market. For IFRS, the residual category will be intangible assets. The IASB does not intend to change this in the near future, despite concerns raised by some members of the Interpretation Committee that the subsequent measurement models in IAS 38 might not provide the most meaningful information.

Contact us

David Baur

David Baur

Director and Leader Accounting Consulting Services, PwC Switzerland

Tel: +41 58 792 26 54