Where Do You Record Digital Currency On Your Balance Sheet?

Not too long ago, the hype around digital currencies exploded, with bitcoin being the flagship cryptocurrency in popular conversation. Everyone raved about the new payment instrument which would swiftly conquer the financial world. Even if all that has cooled off somewhat now, digital currencies have not gone anywhere—indeed, they are spreading, with 100,000+ retailers worldwide accepting them.

Early this year, Japanese bitcoin exchange Bitflyer received its payment institution licence from the CSSF, becoming the European hub for the international trading of the cryptocurrency. In Luxembourg, Bitflyer is second in size only to Bitstamp, which is another major exchange.

With this rise, accountants are asking—and being asked—what bookkeeping for digital currencies should look like. It's an excellent question, and one relevant not just to accountants but also to investors interested in finding cryptocurrency information in financial statements.

The possible accounting futures of digital currency

In current discussions about how to treat digital currency under the International Financial Reporting Standards (IFRS), four views have emerged as to where it should fall under:

IAS 7 Cash or Cash Equivalent IFRS 9 Financial Instruments IAS 38 Intangible Assets IAS 2 Inventory Neither the International Accounting Standards Board (IASB) nor the Financial Accounting Standards Board (FASB) has taken a position on this or offered guidance, meaning that there are several interpretations. The Australian Accounting Standards Board (AASB) is one of the first to make its position known, back in December 2016, addressing the lack of IFRS guidance.

After discussing the requirements for the above-mentioned financial asset categories, the AASB concluded that accounting standards do not really fit the needs of cryptocurrencies. It said that digital currencies meet the definition of IAS 38 and IAS 2 at some level, but stipulated that both standards' treatments are ultimately unsuitable because their measurement methods would not result in relevant information for financial statement issuers.

If digital currencies do not meet the definition of any financial asset, current accounting rules would conclude that cryptocurrencies can be considered to be intangible assets under IAS 38, inventories under IAS 2, or as commodity broker-trader transactions exempt from IAS 2. Accounting-wise, therefore, they are to be shown at cost by default. As a result, gains and losses...