Transparency is everything: crypto-assets in accounting
(Globally) consistent regulation of the crypto industry plays a crucial role in creating trustworthy products and structures while at the same time mitigating risks. Regulatory provisions controlled by independent financial institutions help to increase the confidence of private and institutional investors, prevent fraud attempts and ensure the financial stability of the market.
Due to interdependencies with the international financial market, a prolonged crisis in the comparatively unregulated crypto market is likely to affect the stability of the market as a whole. Without proper regulation, it is difficult to counteract this domino effect. One topic that has so far been somewhat under-discussed is the proper accounting and measurement of crypto-assets to create transparency and comparability in financial reporting. To date, there is still no uniform IFRS standard in place to provide guidance on this issue.
Since international accounting standards do not explicitly address crypto-assets[2], applicable accounting practice is currently derived from existing IFRS. The proposals and assessments of the agenda decision[3] published by the IFRS Interpretations Committee and the EFRAG discussion paper[4] provide practical guidance. This article summarizes the guidelines derived therein on the recognition of crypto-assets.
Categorization of crypto-assets as a type of digital asset
The determination of applicable accounting standards depends on the characteristics or use of the crypto-assets in question. While there is no legal definition of crypto-assets nor a universally accepted framework for their classification to date, several taxonomies already exist, each with different objectives (e.g. MiCAR, EFRAG, Basel Committee, etc.). From an accounting perspective, the categorization is based on the EFRAG taxonomy, which reflects the economic functions and intended uses of the various crypto-assets.
In general, digital assets can be divided into three categories that are based on the asset’s purpose.
- While payment tokens are mainly used as cash (equivalent) and as means of exchange,
- investment tokens can be understood as debt claims as well as investment opportunities.
- Utility tokens as the third category grant holders certain rights to use specific products or services.[5]
The individual categories are listed below, taking into account their economic function in conjunction with the underlying digital assets:
Depending on the characteristics of the token and how it can be used, it is possible to derive accounting recommendations. These are discussed in more detail for each category below.
It should be noted that certain crypto-assets can comprise characteristics from several categories, so-called hybrid tokens, which, however, are not part of this analysis. Other derivative investment vehicles, such as cryptocurrency funds, are also not discussed in this article.
Accounting for payment tokens
Since payment tokens are often used as a medium of exchange, the logical approach is to account for them as cash. As defined by IAS 7.6, this position includes both cash on hand and demand deposits. However, crypto-assets are not demand deposits at credit institutions, so the latter possibility can be excluded.
To meet the cash criteria, the token would have to be a cash deposit in EUR or a foreign currency. While it can be argued that virtual currencies may fall under the concept of foreign currency, this classification mostly fails due to the lack of government recognition of crypto-assets as legal tender. Therefore, from an IFRS perspective, payment tokens do not qualify as cash.
A possible exception is stablecoins, which are a special form of payment tokens and are usually linked to a fiat currency (e.g. the US dollar). In this case, a definition as a cash equivalent would be conceivable and, consequently, accounting in accordance with IAS 7 would be permissible. The same is true for Central Bank Digital Currencies (CBDCs), which are (expected to be) issued by a central bank and could therefore have the characteristics of legal tender.
According to the literature, the regulations for inventories according to IAS 2 or intangible assets according to IAS 38 come into play for the accounting of cryptocurrencies, depending on the intent to hold. IAS 2 applies to assets held for sale in the ordinary course of business. Therefore, this standard may be applied if the assets are held for sale, rather than for investment purposes, and within the scope of the company’s ordinary business activities. In this case, measurement is generally at the lower of acquisition cost and net realizable value.
If the cryptocurrency does not meet the requirements of IAS 2, it should be assessed whether it falls within the scope of IAS 38, which sets out the criteria for recognizing and measuring intangible assets, defined as identifiable non-monetary assets without physical substance. These facts are generally pertinent to cryptocurrencies, which is why they must be recognized as intangible assets under IAS 38 outside of the scope of IAS 2. According to IAS 38, crypto-assets can be measured using either the cost model or the revaluation model. The revaluation model, however, can only be applied if there is an active market for the determination of fair value.
Therefore, cryptocurrencies that have an ascertainable market price can be measured either at cost or at fair value. As the more common cryptocurrencies generally all have an active market, this option or recognition decision may have a significant impact on a company’s financial results.
Accounting for investment tokens
In addition to cryptocurrencies, there are also other crypto-assets that have the characteristics of a digital claim or asset. Investment tokens are generally not used as a medium of exchange, but instead grant the holder certain rights to property or physical assets. Accordingly, these tokens do not fall under the definition of cash on hand and are unlikely to be accounted for as cash under IFRS.
Certain investment tokens represent tokenized investments that give the holder a right against the issuer to receive cash or a financial asset in the future (e.g. in the form of corporate rights). Security tokens, which are similar in nature to a security, are to be measured accordingly. These tokens often represent a contractual right to participate in the issuer’s future profits and therefore qualify for recognition as a financial asset under IAS 32. To recognize tokens that meet the financial asset criteria, entities must comply with the requirements of IFRS 9.
While the characteristics of security tokens are only similar to securities, the entry into force of the Electronic Securities Act (eWpG) has also opened up the possibility of issuing crypto securities. They are a special case of electronic securities that no longer require a paper document and, unlike security tokens, are held in a custodial account and must be registered in a crypto-securities registry. However, the rights of the purchaser are the same for both traditional and electronic securities, so it can be assumed that the recognition of the crypto security meets the applicable standard for financial assets and should therefore be measured in accordance with IFRS 9.
Another variant of this category is the asset-backed token, which is linked to an asset such as real estate or a commodity. The link to an investment item means that the balance sheet recognition of this token depends on the nature of the underlying asset, which in turn determines the applicable accounting standard (e.g. IAS 40 can be applied to investment property in the form of an asset-backed token).
Accounting for utility tokens
Utility tokens represent a separate type of token. They typically grant the holder a right to access or use certain products or services. Utility tokens often represent a prepayment for these products or services and should therefore be accounted for as other prepayments. Once again, however, it is the intent to hold that determines the classification.
If the entity intends to use or receive the underlying assets, this may constitute an advance payment. If, however, the token is to be traded or the entity has no plans to use the products or services, recognition as an advance payment would not be appropriate and the rules for intangible assets in IAS 38 would apply instead.
Conclusion: crypto-assets in accounting – what is the status quo in practice?
Although crypto-assets have been in the spotlight of the financial industry for several years, their accounting treatment is neither clearly defined nor regulated. In practice, attempts are made to use existing IFRS approaches, including an initial classification of the asset. However, these established standards do not take into account the complexity and special nature of crypto-assets, whose varying functions and characteristics lead to different accounting assumptions.
For this reason, there may be a need to adapt or extend existing IFRS to include the characteristics of tokens in the framework to provide comprehensive guidance to entities. Clearly defined guidance will in turn help provide companies with more certainty when dealing with crypto-assets.
Regardless of any future regulatory and accounting developments, financial institutions should be aware that the current accounting framework leaves room for different interpretations on the accounting treatment of crypto-assets. As a result, it is (still) fairly easy to integrate these instruments into existing accounting systems or charts of accounts, and there may be scope for applying advantageous accounting options, such as setting self-defined measurement benchmarks in accordance with IAS 8.
On the other hand, a reform of crypto-asset accounting may lead to a reinterpretation of past practices and the need for adjustments in the measurement methodology as well as in the financial statements. For this reason, institutions that currently hold such instruments and/or plan to invest in crypto-assets should assess and evaluate the accounting implications at an early stage (in consultation with the auditing firm responsible). In this context, consideration should also be given to the corresponding inclusion in other complementary regulations on crypto-assets (e.g. Basel Committee Framework for the Prudential treatment of cryptoasset exposures, Money Laundering Act, etc.).
