The rapid growth of the cryptocurrency market has introduced complex accounting challenges for businesses worldwide. With no single, overarching accounting standard specifically designed for digital assets, companies and accounting bodies have had to adapt existing frameworks to address these new financial instruments.
This article explores how major international public companies account for their cryptocurrency holdings, examining the policies and reporting practices they have adopted under various accounting standards.
Understanding the Current Accounting Landscape
The International Financial Reporting Interpretations Committee (IFRIC) addressed the accounting treatment for cryptocurrencies in June 2019. Its key preliminary conclusion was that cryptocurrencies held for sale in the ordinary course of business should be accounted for under IAS 2, Inventories. For all other holdings, companies should apply IAS 38, Intangible Assets.
Two critical points emerge from this guidance:
- Measurement Models: Intangible assets can be measured using either a cost model or a revaluation model. It's important to note that some jurisdictions, like Taiwan, do not permit the revaluation model for intangible assets in financial reporting for public companies.
- Scope Limitation: The IFRIC's guidance specifically addresses held cryptocurrencies (assets) and does not provide interpretation for borrowed cryptocurrencies, which would be classified as liabilities.
Following the IFRIC's lead, the Accounting Research and Development Foundation in Taiwan issued a guidance document in November 2022 on accounting for cryptocurrency transactions, which aligns with these international conclusions.
Accounting Practices at Major Global Exchanges
Publicly traded companies across different jurisdictions have developed their own accounting policies based on these overarching principles. Their approaches provide a practical roadmap for understanding how crypto assets are reported on financial statements.
US Nasdaq Listed Companies
Coinbase, Inc.
- Primary Business: Cryptocurrency Exchange
- Reporting Standards: US GAAP
Accounting Policy Summary:
- Non-Stablecoin Crypto Assets: These are presented as a separate line item on the balance sheet (non-current). They are treated as indefinite-lived intangible assets, initially measured at cost. They are subsequently measured at fair value, with impairments recognized in earnings. Increases in fair value after an impairment are not recognized until the asset is sold. Cost basis is determined using specific identification.
- Stablecoins (e.g., USDC): These are presented as a separate line item (current) and treated as financial assets. Each stablecoin unit is redeemable for a fixed amount of fiat currency, so its fair value is generally stable, with value primarily affected by exchange rate fluctuations.
Tesla, Inc.
- Primary Business: Electric Vehicle Manufacturing
- Reporting Standards: US GAAP
Accounting Policy Summary:
- Digital assets are presented as "Digital assets, net" on the balance sheet (non-current).
- They are initially recorded at cost and are subsequently measured at fair value, subject to impairment. Similar to Coinbase, subsequent recoveries in value are not recorded; gains are only recognized upon the sale of the assets.
UK London Stock Exchange Listed Company
Mode Global Holdings PLC
- Primary Business: Fintech Payments
- Reporting Standards: IFRS
Accounting Policy Summary:
- Cryptocurrency assets are classified within intangible assets on the balance sheet (with detailed notes separating computer software and virtual currency).
- The company chose to use the revaluation model permitted under IAS 38. Assets are revalued to their fair value based on active market prices.
- Subsequently, changes in fair value are recognized in other comprehensive income (OCI) and accumulated in a revaluation reserve within equity.
Hong Kong Stock Exchange Listed Company
Meitu (美图公司)
- Primary Business: Imaging and Video
- Reporting Standards: IFRS
Accounting Policy Summary:
- Cryptocurrencies are classified as intangible assets with an indefinite useful life. Consequently, they are not amortized but are tested for impairment annually—or more frequently if events or changes in circumstances indicate a potential impairment.
- Impairment losses are recognized if the recoverable amount is less than the carrying amount. Increases in value above the carrying amount are not recognized.
- A gain is only recognized upon the sale of a cryptocurrency, if the proceeds from the sale exceed its carrying amount.
Toronto Stock Exchange Listed Company
Hut 8 Mining Corp.
- Primary Business: Cryptocurrency Mining
- Reporting Standards: IFRS
Accounting Policy Summary:
- Digital assets are presented as a separate line item on the balance sheet (current).
- They are initially measured at cost and subsequently measured using the revaluation model. Unrealized gains from revaluation are recognized in OCI, while unrealized losses are recognized in profit or loss.
- The fair value of these assets is classified as a Level 2 hierarchy input under IFRS 13.
The Future of Cryptocurrency Accounting
The cryptocurrency market has proven to be highly volatile, marked by significant events like the collapse of the algorithmic stablecoin UST, the bankruptcies of major platforms like FTX and BlockFi, and the successful transition of Ethereum to Proof-of-Stake.
The current conservative accounting approach, largely treating cryptocurrencies as intangible assets, leads to asymmetric reporting where losses are recognized but gains are not until sale. A key question for the future is whether major payment cryptocurrencies (like Bitcoin and Ethereum) will eventually be treated similarly to foreign currency (a financial instrument). This would allow for full recognition of fair value changes on the balance sheet, providing a more complete picture of a company's financial position for investors.
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Frequently Asked Questions
Q1: Why are cryptocurrencies often classified as intangible assets?
A: Under IFRS and US GAAP, an asset must meet specific definitions to be classified as cash, a financial instrument, or inventory. Cryptocurrencies generally do not meet these definitions. They are not legal tender, are not issued by a central authority, and, when not held for sale, are not considered inventory. Therefore, the default classification is as an intangible asset.
Q2: What is the main difference between the cost and revaluation models?
A: The cost model carries the asset at its original cost less any impairment losses. The revaluation model carries the asset at its fair value at the date of revaluation. The revaluation model can create more volatility in equity (if gains are stored in a revaluation reserve) but provides a more current value on the balance sheet.
Q3: Can a company change its accounting policy for cryptocurrencies?
A: Changing an accounting policy is a significant decision that must be justified by showing that the new policy provides more reliable and relevant information. Any change must be applied retrospectively and be fully disclosed in the financial statements.
Q4: How is the fair value of a cryptocurrency determined?
A: Fair value is typically based on the quoted market price from the most active exchange the company uses. Accounting standards (like IFRS 13) require disclosure of the valuation techniques and inputs used, classifying them within a fair value hierarchy (Level 1, 2, or 3).
Q5: Are there any specific disclosures required for cryptocurrency holdings?
A: Yes, companies must typically disclose their accounting policies, the carrying amount of digital assets, the methods used to determine cost basis (e.g., FIFO, specific identification), details of impairments, and the nature and risks associated with holding these assets.
Q6: How are gains and losses from the sale of cryptocurrencies reported?
A: When a cryptocurrency is sold, the difference between the net proceeds from the sale and its carrying amount on the balance sheet is recognized as a gain or loss on the income statement. This is typically classified within other income/expenses.