Accounting for Bitcoin

There is diversity in respect of the accounting treatment of Bitcoin because of the differing interpretations and application of the current accounting guidance in International Financial Reporting Standards (IFRS). Furthermore, the International Accounting Standards Board (IASB) has indicated that it would not pursue a separate project on Bitcoin as it believes that there is currently adequate guidance to account for Bitcoin in financial statements. There is a consensus that Bitcoin should be presented as an asset. However, the question is – what type of asset?

Bitcoin as an asset

Since Bitcoin can be identified as an asset, the current accounting guidance is considered when determining the type of asset that Bitcoin should be classified as. The following classification categories are considered; cash, cash equivalents, financial assets, intangible assets, and inventories.

Firstly, Bitcoin does not meet the definition of cash or cash equivalents. Even though Bitcoin acts as a medium of exchange, it has no legal backing and therefore cannot be classified as cash. Additionally, Bitcoin is not a cash equivalent due to its volatility. Similarly, Bitcoin cannot be classified as a financial asset based on the current definition in IAS 32 because it is not cash.

Secondly, Bitcoin does not represent a contractual right as there is no contractual relationship that results in a financial asset for one party and a financial liability for the other. Despite Bitcoin not meeting the definition of a financial asset, some entities in practice still classify their holdings as financial assets, which contributes to diversity in practice.

However, Bitcoin meets the definition of an intangible asset because it is identifiable as it can be sold or exchanged and have a digital form. Bitcoin is also a non-monetary item.

Given the classification of Bitcoin as an intangible asset or inventory, what are the material issues with the measurement of Bitcoin? The fundamental nature of Bitcoin and traditional intangible assets is different because Bitcoin is traded on exchanges, accepted as a form of payment, and experience significant volatility − unlike traditional intangible assets where IAS 38 assumes that these assets are used to produce cash inflows for the entity within its business operations.

In subsequent periods, IAS 38 mentions that an entity shall choose either the cost model or the revaluation model as its accounting policy. If an intangible asset is accounted for using the revaluation model, all the other assets in its class shall also be accounted for using the same model, unless there is no active market for those assets. Under the cost model, Bitcoin is subsequently measured at its ‘cost less any accumulated amortisation and any accumulated impairment losses’. In contrast, the revaluation model requires Bitcoin to be carried at its revalued amount being the fair value (measured with reference to an active market) at the revaluation date less any subsequent accumulated amortisation and any subsequent accumulated impairment losses.

Specifically looking at IAS 2, it is noted that inventories are ‘measured at the lower of cost and net realisable value’. Cost in this instance would be the price that the holder paid to acquire the Bitcoin. If the cost model is used in IAS 38, increases in the value of Bitcoin will only be recognised and realised when it is disposed which defers the exposure to the changes in fair value. Similarly, under IAS 2, the only change in value is if the net realisable value of the Bitcoin is lower than its cost. Hence, the maximum value of the Bitcoin held as inventory is its cost. However, IAS 2 applies a measurement exception to those inventories held by commodity broker-traders and measured at fair value less costs to sell. This means that both increases and decreases in the fair value less costs to sell are recognised. The holder should therefore have a business model and actively buy and sell Bitcoin. Given the lack of clarity and further guidance, this exception may only be applied in narrow circumstances based on the business model, the purpose of selling in the near future, and generating profit from fluctuations in the price which could result in further diversity as the measurement of inventories.

The characteristics of Bitcoin are affected by the variability in cash flows and they are sensitive to market factors as well as other risks. Therefore, Bitcoin's historical cost will differ from its current value. Additionally, users want to see information about the change in the value of Bitcoin and therefore, a cost model may not result in relevant information because the cost model does not provide timely information about the change in value. An entity may choose to measure the cryptocurrency using the revaluation model only if an active market exists, which requires trading with sufficient frequency and volume. Bitcoin is largely traded on exchanges and has an active secondary market.

Bitcoin and financial statements

In terms of the presentation of Bitcoin in the financial statements, it will be presented as intangible assets under assets on the face of the statement of the financial position of the holder. Furthermore, traditional intangible assets will be presented as non-current assets as the benefits are expected to be received over more than one period. Additionally, where Bitcoin is classified as an intangible asset but is held with the intention of being sold within the next 12 months, IFRS 5 will apply. This is because IFRS 5 specifies that these assets should be classified as current assets when they meet the ‘held for sale’ criteria. While inventories are always presented as current assets in terms of IAS 2.

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