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The rise of cryptocurrency became a disruptor in the modern financial system of countries. It has raised a lot of doubts from economists and investors. But, as cryptocurrencies become part of the financial arena, investors are more concerned about accounting for cryptocurrencies.
Existing Accounting Issues
While there is no accounting standard for cryptocurrencies, the practice of accounting around the world is still in the gray area when it comes to accounting for cryptocurrencies.
Cryptocurrencies are digital assets, and it does not take a physical form. Thus, it may be an intangible asset.
But, what if it is for sale? Should accounting standards for inventories apply? Moreover, if cryptocurrencies are held as an investment, will it be accounted for like an investment? Or specifically, will it be treated as a financial instrument?
In the balance sheet, should companies holding cryptocurrencies classify it as current or noncurrent? Since cryptocurrency can be used to settle transactions like money, can it be part of “cash”?
These are just some of the prominent accounting issues for cryptocurrency accounting. With the prevalence of entities acquiring cryptocurrency, accounting standards must move with the developments of cryptocurrencies.
Actions of Standard-Setting Bodies
The International Accounting Standards Board (IASB) and Financial Accounting Standards Boards (FASB) in the United States issued guidance on accounting for cryptocurrency.
In June 2019, the IASB issued a tentative decision regarding the accounting treatment for cryptocurrencies.
According to the IASB, IAS 2 Inventories and IAS 38 Intangible Assets shall apply for the meantime. If cryptocurrencies are held for sale, IAS 2 shall apply. If otherwise, IAS 38 shall apply.
The IASB added that IAS 7 Statement of Cash Flows could not be applied since cryptocurrencies cannot be recognized as “currency,” and it does not fit the definition of “cash and cash equivalents.”
Cryptocurrencies cannot be classified as a “cash equivalent” since cash equivalents are readily convertible into cash. Cryptocurrencies don’t share that characteristic.
IAS 32 Financial Instruments–Presentation won’t apply as well due to the lack of a contractual obligation. A financial instrument creates an obligation between the contracting parties, and this element is missing in the virtual currencies.
According to FASB, ASC 350 Intangibles–Goodwill and Other and ASC 946 Financial Services–Investment Companies shall apply for cryptocurrencies. ASC 946 provides that investment companies should classify cryptocurrencies as “other investment.”
The FASB is in agreement with IASB with regards to cryptocurrency reported as cash and as financial instruments.
Final Notes–About the Future
The IASB is now considering a possible standard for cryptocurrencies. However, in the meantime, existing standards shall apply.
The FASB, on the contrary, is not in the works of issuing standards for cryptocurrencies. But, they promised that they would be in touch for recent updates.
The treatment of cryptocurrencies in financial statements can be a sensitive issue. With the lack of a particular standard, some people might see it as a way to perpetuate fraud. The need for a special standard is becoming a necessity.
Moreover, standard-setters should have the same pace with technological developments. Cryptocurrencies are slowly becoming prevalent in society. With this, proper accounting for cryptocurrencies should follow.