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Cryptocurrencies

Date recorded:

Cryptocurrencies — Holdings of cryptocurrencies (Agenda Paper 4A–4B)

Background

In July 2018, the International Accounting Standards Board (Board) discussed holdings of cryptocurrencies. The Board asked the staff to seek the advice of the Committee about (i) how an entity might apply existing IFRS Standards in accounting for holdings of cryptocurrencies; (ii) whether standard-setting is necessary for holdings of cryptocurrencies and (iii) if so, whether this should be a priority for the Board and what form of standard-setting activity the Board should undertake.

Staff analysis

The staff have considered the nature of cryptocurrencies and conclude that the cryptocurrencies do not meet the definition of a financial asset because (i) cryptocurrencies do not have characteristics of 'cash' since there is insufficient evidence to support a position that they are widely accepted as a medium of exchange and (ii) although cryptocurrencies represent a unit of value on a blockchain, this unit does not provide the holder with a contractual right to receive cash from another entity or to exchange financial assets or liabilities under potentially favourable conditions, instead holders of a cryptocurrency must sell the cryptocurrency at a specialised exchange to obtain cash for it. On the other hand, cryptocurrencies are not an equity instrument of another entity because they do not provide the holder with a residual interest in another entity. Cryptocurrencies are also not a contract that will or may be settled in the entity’s own equity instruments. Further, cryptocurrencies are not cash equivalents under IAS 7 Statement of Cash Flows because the value of the cryptocurrencies is currently subject to significant risk of changes in value.

The staff think the entity would account for holdings of cryptocurrencies applying IAS 38 Intangible Assets, unless it is determined that they are within the scope of another IFRS Standard (e.g. IAS 2 Inventories when entities hold cryptocurrencies for sale in the ordinary course of business).

If the use of a cryptocurrency evolved to such an extent that it is widely used as a medium of exchange and unit of account, then the staff think an entity would reassess these requirements at that time.

The staff analyse the necessity of standard-setting for holdings of cryptocurrencies in the perspectives of:

  1. Usefulness of financial information as there are some debates on the basis of measurement of cryptocurrencies (i.e. historical cost or fair value) that provide useful information to users of the financial statements
  2. Prevalence of holdings of cryptocurrencies taking into account the divergence in practice (some entities account for it under IAS 39 Financial Instruments: Recognition and Measurement or IFRS 9 Financial Instruments while others account for it under IAS 38 or IAS 2) as noted from research of publicly-listed entities.

The staff has analysed three possible standard-setting projects the Board could consider:

  • Approach A — developing an investments standard that incorporates some aspects of IAS 25 Accounting for Investments (withdrawn in 2001) and captures speculative investment transactions (e.g. investments in cryptocurrencies) and investments in items held as a store of value (e.g. gold or artwork) that are not within the scope of IFRS 9 or IAS 40 Investment Property.
  • Approach B — amending the scope of IAS 38 to explicitly exclude cryptocurrencies from its scope and then specifically include cryptocurrencies within the scope of another Standard, for example, IFRS 9 or IAS 40.
  • Approach C — deferring standard-setting and the Board could ask the Committee to publish an agenda decision highlighting either only disclosure requirements for cryptocurrencies or recognition, measurement and disclosure requirements. The Board could then reconsider evidence of prevalence at a later date as part of its consideration of whether to start work on projects in the Board’s research pipeline.

Staff recommendation

The paper does not contain a staff recommendation. Instead, the staff seek an agreement with the Committee on its analysis of the requirements in IFRS Standards as applied to holdings of cryptocurrencies as above and are interested in the Committee’s advice for the Board in relation to the standard-setting alternatives.

Discussion

Before kicking off the discussion, a few Committee members consider this is an urgent issue that the Board has to look into. It is observed that most of the reporters now adopted IFRS 9 fair value through profit or loss measurement by analogy, which is quite different from the staff analysis. During the discussion, a few Committee members had expressed their views of not agreeing with the analysis that cryptocurrency is an intangible asset because it is not used in the operations at all. The indefinite useful life model cannot be used for cryptocurrencies because the model assumes that the asset keeps generating cash flows. Some members thought that the cryptocurrency would need to be amortised. However, other members pointed out that as an indefinite-life intangible, the asset would not be amortised but instead subject to an impairment model. Despite this, a majority of the Committee members agreed with the staff analysis in Paper 4A which includes classification of cryptocurrencies as intangible assets, provided that this is a common understanding based on the current requirements in the IFRS Standards.

The Chair also suggested for discussion of recognition and measurement issues given the prevalence of the issue and the complexity of measurement of cryptocurrencies. The issue of measurement is not only to be dealt with for cryptocurrencies but will be applicable for other industries dealing with trading of tokens in different ways. It is also controversial if changes in the value of cryptocurrencies, which is speculative in nature, are recorded in other comprehensive income if cryptocurrencies are classified as intangible assets, as it may not be an appropriate presentation. Another Committee member suggested that cryptocurrencies are still insignificant compared to cash as the medium of exchange. The issue is insignificant to the world though it may be significant to a particular entity.

A Board member suggested that one pathway would be to scope cryptocurrencies out of IAS 38 and allow the IAS hierarchy to apply.

Cryptocurrencies — Initial coin offerings (Agenda Paper 4C)

Background

In July 2018, the Board discussed cryptocurrencies and decided to refer the accounting for holding cryptocurrencies and accounting for an Initial Coin Offering (ICO) to the Committee. The accounting consideration is the credit side of the entry when the entity accounts for the issue of cryptoassets in an ICO.

Staff analysis The staff think there are a number of IFRS Standards that an entity might consider in determining the appropriate recognition and measurement requirements to apply to an ICO, including IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers, IAS 32 Financial Instruments: Presentation and IAS 37 Provisions, Contingent Liabilities and Contingent Assets. In some cases, the cryptoasset issued by an entity in an ICO may not be in the scope of an IFRS Standard. For example, if an entity has no further obligation to the holder of a cryptoasset it issued in an ICO following the issue and the ordinary activity of the entity is not the issue of new cryptoassets (i.e. the investor in the ICO does not meet the definition of a customer in IFRS 15). If so, the entity applies IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors (IAS 8:10–12) to develop and apply an accounting policy that provides users of financial statements with useful information. The staff concluded that the accounting for each ICO varies from another, depending on the rights and obligations attached to the ICO. The paper also highlighted certain presentation and disclosure requirements. Staff recommendation The staff seek an agreement from the Committee on the above analysis and the paper does not contain a staff recommendation.

Discussion

Most of the Committee members agree with the staff paper and it is critical to look at whether there is any constructive obligation to the investors who subscribed for the coins or tokens through an ICO. Some Committee members suggested to set up a clear roadmap or framework of thought process but not giving an answer. There was no consensus or decision reached.

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