Cryptocurrency is a medium of exchange like ordinary currencies such as the US dollar, but its design purpose is to exchange digital information through a process that is made possible by some cryptography principle. Cryptography is used to protect transactions and control the generation of new coins. The earliest cryptocurrency was Bitcoin in 2009. Cryptocurrency is based on a decentralized consensus mechanism, as opposed to a bank financial system that relies on a centralized regulatory system.(cryptocurrency, 2019) IFRS currently have a broader problem, as there isn't specific accounting standard for investments in intangible assets or non-financial instruments or other commodity-type assets in inventory.
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Cryptocurrency is neither cash nor financial asset, but it is an intangible asset as defined by the International Accounting Standards Agency. In fact, the IFRIC committee issued the provisional agenda decision on its March 2019 meeting. IAS 38 Intangible Assets defines an intangible asset as ‘an identifiable non-monetary asset without physical substance’, and it holds that the cryptocurrency held meets the definition of intangible assets on the grounds that (1) it can be separated from the holder and sold or transferred separately; (2) it does not give the holder the right to charge a fixed or determined number of monetary units. (IFRIC, 2019) Additionally, Under IAS 38, cryptocurrencies would be recognized at cost on initial recognition, with subsequent measurement using either the cost or the revaluation model. If a company applies the cost model, it measures intangible assets at cost less any accumulated amortization and impairment losses. (Henri Venter,2019)
For example, the Bitmain Technologies Holding Company (The world's largest manufacturer of mainstream cryptocurrency miners such as Bitcoin). (Bitmain, 2019) Bitmain has made a clear explanation of cryptocurrency processing: It further selects the cost method to account for cryptocurrencies and reviews their useful lives and impairments at each reporting date in accordance with IAS 38 Intangible Assets. It accounts for cryptocurrencies at cost, rather than reassessing cryptocurrencies at their fair value on each accounting reference date, because the latter model continues to be affected by the inherent and significant fluctuations in cryptocurrency values. In addition, it believes that the cost method better reflects its business model because it never engages in cryptocurrency transactions, but instead earns cryptocurrency from mining machine sales, proprietary mining and mining pool operations. In summary, Bitmain defines the cryptocurrencies obtained from the sale of mining machines, self-operated mining and mining pool operations as 'intangible assets with indefinite useful lives'. The profit or loss is recognized as the main business income.
Professor Mei Luo (2018) pointed out in the report that at present, based on current IFRS literature, digital currencies would meet the definition of an intangible asset. However, she does not believe that the accounting treatment of IAS 38 would provide relevant and useful financial information. She believes that intangible assets are not completely reasonable and have the following measurement difficulties. She believes that the classification of financial assets is a more reasonable method. Intangible assets are generally considered long-term assets and should bring future cash income. For example, the copyright of the film company has given users the ability to develop and use the asset to obtain long-term future cashes income. Cryptocurrency is not expected to bring future cash income. In addition, intangible assets should be listed in long-term assets, but cryptocurrencies are highly liquid and can be traded at any time so should be listed in short-term assets or with cash. In addition, we generally judge the health status of a company's cash flow through the cash flow statement of operating activities, but if it is defined as intangible assets, the cash obtained from the sale of digital currency will not be recorded on the cash flow statement of operating activities, but on investment activity cash flow. Cryptocurrency's liquidity is very high and can be realized almost at any time, but for companies with a lot of cryptocurrency, cash flow from operating activities cannot reflect its liquidity. Therefore, the cash flow from operating activities cannot measure the profitability and the ability to earn cash of a digital currency holding company, especially those that rely on mining as a business activity to hold digital currency. In addition, in order to fairly reflect the true value of intangible assets, we need to do an impairment test, but the price of cryptocurrency is very volatile, and it is also difficult to make an impairment. It does not provide users with complete information that reflects the true value of digital currencies. It even directly affects the valuation of the company.
Overall, In the final analysis, all these problems are not updated uniform securities, tax and accounting standards to regulate how cryptocurrency should be accounted. The transaction volume and importance of cryptocurrencies is increasing to today's business society. IFRS whether the intangible should be modified under the existing bulletin to apply to cryptocurrencies, or to be regulated by a new classification, remains to be further explored and studied.
- Bitmain, 2019. bitmain company profile. [online] available for: https://en.wikipedia.org/wiki/Bitmain. [Accessed 07/12/2019].
- Cryptocurrency, 2019. What is called cryptocurrency? [online] available for: https://baike.baidu.com/item/%E5%8A%A0%E5%AF%86%E8%B4%A7%E5%B8%81/22415288. [Accessed 30/11/2019].
- Henri Venter,2019. [online] Available for: https://vle.dmu.ac.uk/bbcswebdav/pid-4354987-dt-content-rid-7867626_1/courses/ACFI3221_1920_520/ap2d-digital-currencies-paper.pdf. [Accessed 05/12/2019].
- IFRIC, 2019. Cryptocurrencies under IFRSs. [online] available for: https://www.dreport.cz/en/blog/cryptocurrencies-under-ifrss/. [Accessed 03/12/2019].
- Mei Luo, (2018). How cryptocurrencies are accounted for? [online]. Tsinghua University. Available for: https://www.zhongbi.net/news/blocknews/121218.html. [Accessed 07/12/2019]