Crypto-currency Accounting

I read a great blog post by Gary Berchowitz, a PWC partner.  In the post, Mr. Berchowitz ruminates about the IFRS accounting for holdings/investments in crypto-currency, such as Bitcoin, Ethereum, etc.

He points out that, absent any deep reflection, most accountants would argue for fair value accounting for such investments.  After all, Bitcoin and other cryto-currencies are used either for global payment, like a foreign currency, or as a speculative investment, like a marketable financial instrument.

For the record, Mr. Berchowitz certainly captured my view, as shared with my international accounting class, regarding the accounting for Bitcoin and such.

In a recent discussion with my class, I suggested, and most agreed, that a company should apply the guidance in IAS 21, The Effects of Changes in Foreign Exchange Rates.  Under IAS 21, a company would account for holdings in crypto-currency similar a foreign currency “transaction” position.  Therefore, they would adjust the reported value of the Bitcoin asset based on changes in its “spot-rate” from period-to-period.  Such changes would be reported in P&L.

However, Mr. Berchowitz points out that Bitcoin is not a currency, which by definition is a monetary asset, because it is not:

  1. Legal tender (i.e. cash as defined);
  2. A cash equivalent, i.e., because its value is exposed to significant changes in market value; and is not
  3. A contractual right to receive either cash or a cash equivalent.

Therefore, we shouldn’t apply the fair value accounting approach of IAS 21 (or similar accounting approaches based on monetary asset definitions, such as IAS 39/IFRS 9).  Those approaches refer to monetary assets, which does not apply to a cryto-currency.

Instead, Mr. Berchowitz suggests that the applicable accounting guidance is more appropriately defined in either IAS 2, Inventories, or IAS 38, Intangible Assets.

Mr. Berchowitz then explains the IAS 2 approach, which is basically a lower-of-cost or net realizable value model.

He didn’t discuss the IAS 38 approach.  IAS 38 allows companies to account for intangible assets using either a cost/amortizable cost model or a sort of fair value approach called “the revaluation” model.  The revaluation model has elements of a fair value approach, i.e. periodically, companies would adjust the value of their intangible asset to its fair value.  Related revaluation adjustments are accounted for as follows:

  1. If an intangible asset’s carrying value increases, because of a revaluation, a company accounts for that increase in equity, i.e., in other comprehensive income, rather than in P&L, unless there was a prior revaluation loss (see below).  Then the increase, which is called a “revaluation surplus,” is used to reverse prior revaluation losses to the extent of amounts previously reported in P&L.
  2. And, if an intangible asset’s carrying amount decreases, because of a revaluation, the decrease is reported in P&L. However, such decrease must be used to reverse amounts reported in other comprehensive income to the extent of any previously reported revaluation surplus related to that asset.

So, by applying the IAS 38 revaluation model, companies can somewhat achieve a fair value approach, however, the IAS 38 model is asymmetrical with respect to reporting revaluation increases and decreases, as discussed.

Of course, with the current volatility of crypto-currencies, like Bitcoin, I’m sure that most companies would prefer to avoid a fair value model, particularly if the accounting for revaluation increases and decreases are asymmetrical.

Other opinions on this issue would certainly be appreciated.

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