This guidance is essential for entities that hold digital assets and need to incorporate them into their financial statements accurately.
In the context of this guidance, exchange-based tokens include common types of digital assets that leverage blockchain to transfer value among the holders, such as Bitcoin and Ethereum. We define exchange-based tokens using the following criteria:
- do not provide the asset holder with enforceable rights to or claims on underlying goods, services, or other assets;
- are created or reside on a distributed ledger based on blockchain or similar technology;
- are secured through cryptography;
- are fungible; and
- are not created or issued by the reporting entity or its related parties.
Accounting for direct holdings of exchange-based tokens
The economic substance of the exchange-based tokens and what the entity intends to do with the exchange-based tokens held is important as it will be the starting point for determining an appropriate accounting treatment.
Cash or cash equivalents
Exchange-based tokens may be considered cash or cash equivalents if they are widely accepted as a medium of exchange and subject to an insignificant risk of changes in value. However, due to their volatility and the current legal environment in the UK, they typically do not meet these criteria. Evidence to date demonstrates that exchange-based tokens are often subject to a reasonable amount of volatility in value.
Financial instruments
While it may be possible to exchange exchange-based tokens into cash (by selling them on an exchange to another investor in exchange for cash), the holder does not have a contractual right to cash or another financial asset. So, if exchange-based tokens are not cash, the equity instruments of another entity or the contractual right to receive cash or another financial asset, they do not give rise to a financial asset of one entity and therefore are not likely to meet the definition of a financial instrument under FRS 102.
Inventories
If exchange-based tokens are bought and sold as part of the entity’s ordinary course of business, they may be classified as inventories.
Intangible assets
Exchange-based tokens are likely to be classified as intangible assets due to their identifiable nature and lack of physical substance.
Exchange-based tokens might be considered non-monetary assets where they are:
- not units of currency held; and
- assets and liabilities to be received or paid in a fixed or determinable number of units of currency.
As a form of digital asset, exchange-based tokens do not have a physical substance as a matter of course.
Initial recognition and measurement
Exchange-based tokens which are not held for trading and also meet the definition of an intangible asset, are recognised from the point the entity obtains control. Control is the ability to access and direct the use of the asset and the ability to restrict others from accessing and directing the use. Control of exchange-based tokens will be presumed to exist from the point at which the entity can make sell and hold decisions regarding the exchange-based token.
The general recognition criteria for intangible assets require that:
- it is probable that the expected future economic benefits attributable to the asset will flow to the entity; and
- the cost or value of the asset can be reliably measured (FRS 102.18.4).
All intangible assets are initially measured at cost (FRS 102.18.9).
Subsequent measurement
There are two models for subsequent measurement of intangible assets: the cost model and the revaluation model. The choice between these models depends on whether there is an active market for the tokens.
Active market
An active market is necessary for the revaluation model. An active market is one in which the items traded are homogeneous, willing buyers and sellers can normally be found at any point in time and prices are available to the public (FRS 102 Appendix I: Glossary). Further guidance was given in the Periodic Review 2024 amendments namely an active market is one “in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis”.
While FRS 102 does not provide explicit guidance on how to interpret this definition, it appears clear that only a market with a sufficient level of trading activity (ie, frequency of trades) and volumes will be considered active. As such, an active market may exist for some but not all exchange-based tokens, so the specific circumstances of each exchange-based token would need to be considered carefully on a case-by-case basis.
Frequency of valuations
Due to the volatile nature of exchange-based tokens, it advisable to perform valuations at least at the end of each reporting period to ensure that the carrying amount does not differ materially from the fair value.
Measuring revaluation gains and losses and treatment of accumulated amortisation
Another issue arising under FRS 102 relating to the revaluation model is the question of how to treat accumulated amortisation upon subsequent measurement. FRS 102 is not explicit; however, in practice, where the intangible asset is being revalued in excess of its current carrying value, accumulated amortisation is eliminated against the gross carrying value, resulting in a reduction in accumulated amortisation.
Amortisation and impairment
All intangible assets, including exchange-based tokens, are considered to have a finite useful life under FRS 102. The entity is required to estimate the useful life of the tokens, which can be complex due to the nature of such assets. If a reliable estimate cannot be made, the life should not exceed 10 years.
Residual value
The amount of amortisation to be recognised in profit or loss on a systematic basis over the estimated useful life of an intangible asset is calculated based on the intangible asset’s depreciable amount. The depreciable amount of the intangible asset is the cost of the intangible asset less its residual value, being the amount the entity could obtain from disposal, after deducting estimated costs of disposal, if the asset was already of the age and condition expected at the end of its useful life (FRS 102 Appendix I: Glossary).
If the residual value is estimated to be equal to or exceed cost, no amortisation would be recorded within profit or loss.
Derecognition
Exchange-based tokens are derecognised when the entity ceases to control them, generally upon disposal. Any gain or loss on disposal is recognised in the statement of profit or loss.
Presentation of exchange-based tokens in the financial statements
Entities must present exchange-based tokens in their financial statements according to their classification.
The presentation and disclosure requirements for crypto assets involve several considerations. Entities holding crypto assets should:
- disclose accounting policies and principles related to crypto assets;
- address risks and uncertainties associated with crypto assets;
- separate in-scope crypto assets from other intangible assets on the balance sheet.
- record remeasurement separately from amortization or impairment in the income statement; and
- provide additional disclosures, including significant crypto asset holdings and reconciliation of beginning and ending balances.
Disclosures
Preparers of financial statements will need to adhere to the relevant accounting disclosure requirements of Section 13 or Section 18 of FRS 102, as applicable, depending on whether the exchange-based tokens are classified as inventories or intangible assets.
Clear disclosures are crucial for the financial statements to ensure users understand the recognition, measurement, and presentation of exchange-based tokens.
Impact on distributable profits
The complex issue of whether gains or losses associated with exchange-based tokens are distributable requires significant judgement. We recommend that members consider the guidance contained within ICAEW Technical Release Guidance on realised and distributable profits under the Companies Act 2006 when making such judgements. Entities might also consider seeking the guidance of an exchange-based tokens expert given the complexities associated with this area.
Going forward
However, accounting for exchange-based tokens is a new and rapidly evolving area. The accounting and financial reporting treatment will vary depending on the entity’s business model, and different treatments may be possible. Entities should document and justify any decisions made and keep abreast of accounting developments. They may also need to seek the guidance of an exchange-based tokens expert given the complexities associated with this area.