This helpsheet has been issued by ICAEW’s Technical Advisory Service to help ICAEW members to account for the cryptocurrencies under FRS 102.

Currently neither IFRS nor UK GAAP make specific reference to the accounting for cryptocurrencies (which are a subset of cryptoassets) which include Bitcoin, Ethereum and Ripple as well as a range of newer cryptocurrencies being released. The purpose of this helpsheet is to consider both the potential accounting treatments under FRS 102 and the presentation of cryptocurrencies within the financial statements. It should be noted that this is still an emerging area and practice will no doubt evolve over time.

Anyone holding or working with clients that hold cryptocurrencies should ensure they have sufficient knowledge and experience as well as carefully documenting any choices or judgments made.

The business model and what the entity intends to do with the cryptocurrencies held is important as it will be the starting point for determining an appropriate accounting treatment.

Members may wish to refer to the following related helpsheets:

• Intangible assets and goodwill under FRS 102
• Can I revalue intangible assets under FRS 102?

Cash or cash equivalents?

Cash and cash equivalents are defined in the glossary to FRS 102 respectively as:

It is generally accepted that cryptocurrencies are not cash as they are not legal tender though they are sometimes used in place of cash when exchanging goods and services. Likewise, it is unlikely to be appropriate to treat cryptocurrencies as cash equivalents as cryptocurrencies are subject to a greater than insignificant risk of change in value. Also, the holder of cryptocurrency does not have a right to cash and therefore it is difficult to argue that they are short-term, highly liquid investments. As cryptocurrencies continue to evolve, this may change.

Financial instruments?

Cryptocurrencies would not be considered financial instruments under FRS 102 as they do not meet the definition. Financial instruments are defined in the glossary to FRS 102 as:

As discussed, whilst it may be possible to exchange cryptocurrencies into cash, the holder does not have cash or the right to cash. So, if cryptocurrencies are not cash, the equity instruments of another entity or the contractual right to receive cash, they do not give rise to a financial asset of one entity and are therefore not a financial instrument.

Inventories?

The definition of inventories contained within the glossary of FRS 102 includes assets held for sale in the ordinary course of business. Cryptocurrencies would not necessarily be precluded from being treated as inventory if they are being purchased and sold as part of the entity’s ordinary course of business. This may be applicable for entities trading cryptocurrencies in the short term.

If an entity were to include cryptocurrencies within inventory, then it follows that holding them at the lower of cost and estimated selling price less costs to complete and sell (i.e. net realisable value) would usually be appropriate (FRS 102 paragraph 13.4).

This may lead to impairment of the cryptocurrency should its estimated selling price less costs to complete and sell fall below its cost.

However, under Companies Act it is possible to measure some inventories at fair value less costs to sell through profit and loss. Paragraph 13.3 of FRS 102 states this method of measurement should only be used if it is a more relevant measure of the entity’s performance because the entity operates in an active market where sale can be achieved at published prices, and inventory is a store of readily realisable value.

Where an entity trades in cryptocurrency with an active market, the above treatment may be acceptable.

Intangible assets?

An investment in cryptocurrencies would likely be considered intangible under FRS 102. The glossary of FRS 102 defines an intangible asset as:

Cryptocurrencies are likely to be considered identifiable as they are capable of being separated from the entity and are often saleable on cryptocurrency exchanges for example.

FRS 102 paragraph 18.18 permits an accounting policy choice, by class of intangible asset, between the cost model and revaluation model:

• Under the cost model, cryptocurrency would usually be recorded at cost less any accumulated amortisation and any accumulated impairment losses.
• Under the revaluation model, cryptocurrency would usually be carried at a revalued amount, being its fair value on the date of revaluation less any subsequent accumulated amortisation and subsequent accumulated impairment losses, provided that the fair value can be determined by reference to an active market.
  - Increases in market value would be recognised through other comprehensive income (OCI) and would accumulate in a revaluation reserve. The increase would however be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss.
  - Decreases of an asset’s carrying value as a result of a revaluation shall be recognised in other comprehensive income (OCI) to the extent of any previously recognised revaluation increase accumulated in equity in respect of that asset, any excess shall be recognised in profit or loss.

In order to apply a revaluation model though, an entity would need to meet the criteria and follow the requirements of FRS 102 paragraphs 18.18B to 18.18H. See our helpsheet Can I revalue intangible assets under FRS 102?. One of the essential criteria is the need for an active market. An active market may exist for some but not all cryptocurrencies, so the specific circumstances of each cryptocurrency would need to be considered carefully on a case by case basis.

Company law principles permit intangible fixed assets to be held under historical cost accounting rules (a cost model) or under the alternative accounting rules (a revaluation model).

Moreover, the accounting requirements of Section 18 of FRS 102 would also meet the accounting requirements for fixed asset investments under company law.

Once a reasonable accounting treatment has been determined, it will then be necessary to consider how the cryptocurrencies should be presented in the financial statements in line with the Companies Act formats. The Large and Medium-Sized Companies and Groups (Accounts and Reports) Regulations 2008 (SI 2008/410) provides formats for both the profit and loss and balance sheets. Similar formats are applicable to companies subject to the Small Companies and Groups (Accounts and Directors’ Report) Regulations 2008 (SI 2008/409).

Cryptocurrencies that are being accounted for as inventories under Section 13 would fall within stock under current assets.

Cryptocurrencies that are being accounted for as intangible assets under Section 18 could be presented on the balance sheet as fixed asset intangible assets or fixed asset investments depending on the intended use of the asset.

The balance sheet formats within SI 2008/410 have a classification ‘Fixed asset, Investments, Other investments other than loans’. If this classification fairly represents the intended use of the asset and provided the accounting requirements of section 18 of FRS 102 have been met, it is possible that this could be an appropriate balance sheet classification for cryptocurrencies. This is because investment is not a defined term under the Companies Act 2006 and so classification as an investment can be reasonable if the entity intends to hold it as such.

Judgement will be required to determine the most appropriate financial statement presentation in any given scenario.

Disclosures

Whichever treatment is adopted, clear disclosures will be needed in the financial statements to ensure the user gains clarity as to how the cryptocurrencies are presented, as well as understanding the nature of these assets and their financial effect.

Accounting for cryptocurrencies is still a new and rapidly evolving area.

Overall, the treatment of cryptocurrencies will vary depending on the entity’s business model and a range of accounting treatments may be possible.

When working with cryptocurrencies, members should ensure they document and justify any decisions made. Members also need to understand the nature and substance of the transaction and, in many cases, this might involve seeking the guidance of a cryptocurrencies expert. Members should keep abreast of accounting developments and be aware that there may be a need to adapt or update accounting treatments as new guidance emerges.

ICAEW members, affiliates, ICAEW students and staff in eligible firms with member firm access can discuss their specific situation with the Technical Advisory Service on +44 (0)1908 248 250 or via webchat.