Since 2010 cryptocurrencies have disrupted the world of finance and technology. However, at the time of writing, it may be surprising to learn that neither UK GAAP or IFRS make any specific reference to the accounting for cryptocurrencies. We explore below whether cryptocurrencies should be treated as cash or cash equivalents, financial instruments or intangible assets under FRS 102, and their presentation in the financial statements.
Accounting treatment - cash or cash equivalents?
Cash and cash equivalents are defined in FRS 102 as “cash on hand and demand deposits and short-term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value”.
Cryptocurrencies are not regulated by central banks and therefore are not generally considered or accepted as legal tender. Additionally, it seems unlikely to be able to treat cryptocurrencies as cash equivalents because they are subject to a greater than insignificant risk of a change in value. As the chart below shows (Source: FT), the price of one popular cryptocurrency (Bitcoin) has fallen from around $65k in November 2021 to $30k in May 2022. At the time of writing, the current price of Bitcoin is $22k 02/08/2022).
Accounting treatment - financial instruments?
Financial instruments are defined in FRS 102 as “a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another equity”
Whilst it may be possible to exchange/convert cryptocurrencies into cash, the holder does not have a contractual right to the cash, and therefore does not give rise to a financial asset.
Accounting treatment - Intangible assets?
Intangible assets are defined in FRS 102 as “an identifiable non-monetary asset without physical substance. Such an asset is identifiable when:
(a) it is separable, i.e. capable of being separated or divided from the entity and sold, transferred, licensed, rented or exchanged, either individually or together with a related contract, asset or liability; or
(b) it arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from the entity or from other rights and obligations.”
It is possible that cryptocurrencies could be considered as intangible assets as they are likely to be separated from the entity and in some cases are often sold on cryptocurrency exchanges. This appears to be the most likely definition which could be supported by to the majority of cryptocurrencies.
FRS 102 paragraph 18.18 permits a choice between different classes of intangibles between the cost model and revaluation model. In the latter case, an entity needs to ensure the criteria in 18.18B to 18.18H are met, where one of the key criteria is that an active market exists. This may be true for popular cryptocurrencies such as Bitcoin, Ethereum, Tether and so on, but this may not hold for all cryptocurrencies and therefore would have to be considered on a case-by-case basis.
Financial statement presentation
Presentation in the financial statements will be governed by the Companies Act formats and will differ depending on whether: the Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 (SI 2008/409) or, the Large and Medium-Sized Companies and Groups (Accounts and reports) Regulations 2008 (SI 2008/410) is applicable to the entity.
It is clear there are significant subjective judgements to be made in this area, not least the most suitable accounting treatment but also presentation in the financial statements. The general consensus, at least at the time of writing is that cryptocurrencies should be accounted for as intangible assets. If this is the case, then under FRS 102 Section 18 they could be presented on the balance sheet as either fixed asset intangible assets or fixed asset investments. This will depend on the intended use of the asset, because the term “investment” is not specifically defined in the Companies Act 2006 it might be reasonable to classify holding as an investment.
Developments are likely to occur as new guidance emerges.
For more information, please get in touch with Peter Foley.
First Published 9 August 2022
Last Updated 9 August 2022
9 August 2022
Find out more about Peter Foley