“Binance Cryptocurrency Exchange App” by wuestenigel is licensed under CC BY 2.0
“Binance Cryptocurrency Exchange App” by wuestenigel is licensed under CC BY 2.0

How do companies account for cryptocurrency compared to traditional money?

Depending on how a cryptocurrency is classified would change how it is accounted for. IAS 38.8 defines an intangible asset as, “an identifiable non-monetary asset without physical substance.”1 With this definition it seems that cryptocurrencies can be classified as an intangible asset. Cryptocurrency should be recognized at initial cost.2 It can then be measured either at cost or at fair value.3 Since there is no useful life for a cryptocurrency it would qualify as indefinite lived intangibles.4 The revaluation method can only be used if there is an active market for cryptocurrency.5 This means that an entity wanting to use the method would need to prove than an active market exists.6 With this method, if the fair value increases it is recorded as other comprehensive income (OCI), while decreases are recorded as profit or loss.7 The other comprehensive income account will be the net increase in fair value over time while the profit or loss would be the net decrease in fair value over time.8 If a cryptocurrency is held in normal business operations it would be accounted as inventory under IAS 2.9 Under IAS 2, they would be measured at the lower of cost and net realizable value.10 Any decreases in net realizable value would be recorded in the statement of profit or loss and increases in excess of previous recorded decreases would not be recorded.11 If the company is a commodity broker-trader, they will measure at fair value less costs to sell and changes and any changes in value would be recorded in profit or loss.12 The Canada Revenue Agency stated that any transaction involving cryptocurrency that creates income it would be treated as business income or capital gain.13

How is accounting affected by cryptocurrency?

Are cryptocurrencies assets? If they are, what type of assets are they under IFRS Standards? Different cryptocurrencies have may have different characteristics. An accounting policy for one cryptocurrency may not be appropriate for others.14 Each cryptocurrency holding should be evaluated individually.15 If an entity determines that a cryptocurrency is an asset, which would it fall under? (Cash, non-cash financial assets, investment properties, intangible assets, inventory). Cash is defined as, “Cash comprises cash on hand and demand deposits” and “Currency (cash) is a financial asset because it represents the medium of exchange…”.16 Foreign currency would be usually be considered cash. Not all cryptocurrencies can be used as a medium of exchange and are limited compared to fiat currencies.17 Cryptocurrencies don’t meet the definition of cash equivalent as they don’t have a short-term life and often can have significant short-term changes in value.18 There may also be limitations on liquidity and converting back to fiat currencies.19 Cryptocurrencies don’t typically have contractual rights so they cannot be a non-cash financial asset.20 Cryptocurrencies are not land or building so they are not an investment property.21

How is audit and/or accounting role affected by increasing use of cryptocurrency?

Cryptocurrencies have been used in money laundering and other criminal activities.22 The anonymity and mostly unregulated exchanges also add to the issue.23 If an auditor encounters a prospective client who hasn’t implemented a process to track cryptocurrency transactions it may be very difficult or not practical to audit the client’s financial statements.24 An auditor may inquire the purpose for entering into cryptocurrency or a significant change in the nature of their activities.25 If the transactions are outside of normal business an auditor would need to: evaluate whether it gives rise to significant risks, inquire about the nature of the transactions and parties involved, and whether they have entered to engage in fraudulent financial reporting or to conceal misappropriation of assets.26 Since cryptocurrency is highly complex, valuation experts may be required and the auditor will need to determine if the party possesses the appropriate competency and capabilities.27 If an entity uses an online exchange, an auditor may need to consider who owns the exchange, the exchange reputation, the country it is located in, and the cryptocurrency and fiat currencies allowed to be traded.28 If a cryptocurrency wallet isn’t accounted for, the risk of material misstatement might be difficult to assess as the identity of parties participating in transactions aren’t transparent in a blockchain.29 This would make it difficult to state that significant cryptocurrency transactions may not have been recorded.30 If there was an indication the wallet may have been deliberately hidden, it may indicate fraud risk.31 The loss of a private key would mean that the asset no longer linked to the entity.32 This may become an issue as the entity may not know that the private key is lost when financial statements were prepared.33 An auditor may also find it difficult to determine the ownership of the private key as it could be shared between parties or owned solely by the entity.34 Since IFRS Standards don’t explicitly reference cryptocurrencies, the measurement of cryptocurrencies at cost might not be reflective and provide relevant information.35 Cryptocurrencies are also very volatile, so the time at which an entity reports their values might be important.36 There may also be significant volumes of transactions that might not be available until a later date.37 Since blockchains are digital, auditors would be able to obtain consistent information in near real-time.38 If a significant amount of transactions are recorded in a blockchain, a CPA auditor might be able to develop a software to continuously audit an organization through that blockchain.39

Where you can find examples of financial statements reporting using crypto?

In the United States, a cryptocurrency such as bitcoin would fall under the rule of intangible assets. MicroStrategy Incorporated stated in their Form 10-K that they bought $1.125 billion in digital assets during the second half of 2020 that comprised entirely of bitcoin.40 They account for their digital assets and indefinite-lived intangible assets.41 On the following page is a snapshot of their consolidated balance sheets located on page 69 of their Form 10-K and the consolidated statements of cash flows located on page 73.

Microstrategy balance sheet
Microstrategy balance sheet
Microstrategy cash flow
Microstrategy cash flow

Square, Inc. stated in their Form 10-K that they bought $50 million in bitcoin in October 2020 and $170 million in February 2021.42 They also account for bitcoin as an indefinite-lived intangible asset meaning that any decreases in market price below cost would be recorded as an impairment charge.43 Below is a snapshot of their consolidated balance sheets located on page 84 of their Form 10-K.

Square balance sheet
Square balance sheet

Sample journal entries if possible, for accounting for and with cryptocurrency.

The following three journal entries were taken from Medium.44

The journal entry below assumes that a company, Bitmain, sold products for 1 BTC which at the time was valued at $10,000.

Journal entry selling for Bitcoin
Journal entry selling for Bitcoin
The journal entry below assumes that the price of bitcoin dropped by 25% by the end of the next quarter.
Journal entry with falling value
Journal entry with falling value
The journal entry below assumes that the price of bitcoin increased to $9,000 by the end of the next quarter and that Bitmain sold it for cash.
Journal value with rising value and selling for cash
Journal value with rising value and selling for cash

What does that mean for accounting as a whole but also as an accountant?

There will be a new type of asset that businesses may have to account for. Experts may need to be hired to do certain activities such as valuation of cryptocurrency. These additional steps could introduce more points of failures where errors could occur. Accountants may also not be well versed in cryptocurrency which could delay the already long process of auditing. How does this impact education and training? As cryptocurrency fairly new and is changing all the time, there may need to be frequent training. The IFRS Standards which don’t explicitly reference cryptocurrency currently may also need to be updated. Governments may also start imposing restrictions and policies as time moves on. Accountants will need to keep ahead of the curve and on top of all the new information as cryptocurrency merges into the current system.

Works Cited

Canada Revenue Agency. (2019, June 27). Guide for cryptocurrency users and tax professionals. Retrieved from Government of Canada: https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/compliance/digital-currency/cryptocurrency-guide.html Cipolaro, G. (2018, October 4). Crypto Accounting with Bitmain’s Filing. Retrieved from Medium: https://medium.com/digitalassetresearch/crypto-accounting-with-bitmains-filing-94d5f685f134 CPA Canada. (2017). Blockchain Technology and Its Potential Impact on the Audit and Assurance Profession. Retrieved from Deloitte: https://www2.deloitte.com/za/en/pages/audit/articles/impact-of-blockchain-in-accounting.html# CPA Ontario. (2018, July). Audit considerations related to cryptocurrency assets and transactions. Retrieved from CPA Canada: https://www.cpacanada.ca/en/business-and-accounting-resources/audit-and-assurance/canadian-auditing-standards-cas/publications/cryptocurrency-audit-considerations CPA Ontario. (2018, May). Introduction to accounting for cryptocurrencies under IFRS. Retrieved from CPA Canada: https://www.cpacanada.ca/en/business-and-accounting-resources/financial-and-non-financial-reporting/international-financial-reporting-standards-ifrs/publications/accounting-for-cryptocurrencies-under-ifrs KPMG. (2019, April). Accounting for cryptoassets – What’s the impact on your financial statements? Retrieved from KPMG: https://assets.kpmg/content/dam/kpmg/xx/pdf/2019/04/cryptoassets-accounting-tax.pdf MicroStrategy Incorporated. (2021, February 12). SEC Filings and Documents Archive. Retrieved from MicroStrategy: https://www.microstrategy.com/content/dam/website-assets/collateral/financial-documents/financial-document-archive/Form-10-K_01-12-2021.pdf Square, Inc. (2021, February 23). Investor Relations. Retrieved from Square: https://s27.q4cdn.com/311240100/files/doc_financials/2020/q4/Square-10K-2020.pdf

  1. (CPA Ontario, 2018) ↩︎

  2. (CPA Ontario, 2018) ↩︎

  3. (CPA Ontario, 2018) ↩︎

  4. (CPA Ontario, 2018) ↩︎

  5. (CPA Ontario, 2018) ↩︎

  6. (CPA Ontario, 2018) ↩︎

  7. (CPA Ontario, 2018) ↩︎

  8. (CPA Ontario, 2018) ↩︎

  9. (KPMG, 2019) ↩︎

  10. (CPA Ontario, 2018) ↩︎

  11. (CPA Ontario, 2018) ↩︎

  12. (CPA Ontario, 2018) ↩︎

  13. (Canada Revenue Agency, 2019) ↩︎

  14. (CPA Ontario, 2018) ↩︎

  15. (CPA Ontario, 2018) ↩︎

  16. (CPA Ontario, 2018) ↩︎

  17. (CPA Ontario, 2018) ↩︎

  18. (CPA Ontario, 2018) ↩︎

  19. (CPA Ontario, 2018) ↩︎

  20. (CPA Ontario, 2018) ↩︎

  21. (CPA Ontario, 2018)   ↩︎

  22. (CPA Ontario, 2018) ↩︎

  23. (CPA Ontario, 2018) ↩︎

  24. (CPA Ontario, 2018) ↩︎

  25. (CPA Ontario, 2018) ↩︎

  26. (CPA Ontario, 2018) ↩︎

  27. (CPA Ontario, 2018) ↩︎

  28. (CPA Ontario, 2018) ↩︎

  29. (CPA Ontario, 2018) ↩︎

  30. (CPA Ontario, 2018) ↩︎

  31. (CPA Ontario, 2018) ↩︎

  32. (CPA Ontario, 2018) ↩︎

  33. (CPA Ontario, 2018) ↩︎

  34. (CPA Ontario, 2018) ↩︎

  35. (CPA Ontario, 2018) ↩︎

  36. (CPA Ontario, 2018) ↩︎

  37. (CPA Ontario, 2018) ↩︎

  38. (CPA Ontario, 2018) ↩︎

  39. (CPA Ontario, 2018) ↩︎

  40. (MicroStrategy Incorporated, 2021) ↩︎

  41. (MicroStrategy Incorporated, 2021) ↩︎

  42. (Square, Inc., 2021) ↩︎

  43. (Square, Inc., 2021) ↩︎

  44. (Cipolaro, 2018) ↩︎