Accounting for cryptocurrencies

12. October 2019

The first attempts to introduce a kind of electronic money took place already mid-20th century when the internet began gradually growing. The aim was to establish a specialised electronic payment tool which would enable quick payments in real time regardless of state borders and the geographical location of the participants.

The birth of Bitcoin, the first cryptocurrency, had similar motivation. Classic money transfers were slow and expensive, and lacked transparency and anonymity. None of this is true for Bitcoin. Bitcoin is a digital asset rooted in cryptography and was created in order to serve as a means of exchange. Bitcoin is a code which must be computed and then logged into a distributed book which cannot be altered in any way after that. The maximum total volume of Bitcoins is finite and mining becomes more and more expensive as the number of possible combinations reduces. In 2011 economy experts took notice of this currency, and two years later so did the general public. At that time, the Euro was experiencing severe crises and people were searching for an alternative. That’s when the price of Bitcoin began growing rapidly. 2013 was the year of the Bitcoin and at the same time an opportunity to invest and increase the value of one’s assets. Bitcoins can be bought same as any other currency. It is also possible to speculate in Bitcoins at the foreign exchange market just as you would with other currencies.

The phenomenon of cryptocurrency is very interesting in itself, but cryptocurrencies also bring about interesting accounting questions as regards their presentation and measurement in financial statements. That is because accounting standards (such as the IFRS or the Czech Accounting Standards) do not cover accounting for cryptocurrencies at all.

The IFRS (International Financial Reporting Standards) contain no rules regarding cryptocurrencies. However, there is a rule in the IFRS which says that in a situation for which there is no explicit legal framework, the entity shall choose the appropriate accounting methods using the general approach. The key prerequisite to compliance with the demands of the IFRS is presentation of cryptocurrencies based on the purpose for which they were obtained and are used. The IFRS list possible options for presentation of cryptocurrencies when the purposes has been clarified. Cryptocurrency may be presented as a means of payment, short- or long-term non-financial investment, or as stock of products or goods.

The Czech Accounting Standards also do not mention cryptocurrencies. However, the Ministry of Finance issued a recommendation on 15 May 2018 which – despite the possible different motives for ownership and usage of digital currencies – suggests that they be accounted for and presented uniformly by all users. This basically means that digital currencies should be presented and measured in financial statements as a kind of stock and should be recorded on a separate line as part of entry “C.I.2. Unfinished product”, “C.I.3.1. Articles”, or “C.I.3.2. Goods”. It is also possible to follow Article 4 (1) of the regulation and present digital currencies separately apart from other entries of stock by adding another entry. The reason for acquisition and ownership of digital currencies and their appraisal should be part of the attachment to the financial statements. There is also the possibility of creating a corrective entry.

The National Accounting Council, which worked on the recommendation together with the Ministry on Finance, has been concerned with these issues as well, and it is currently preparing an interpretation. The interpretation is not to alter the information given by the Ministry, only to add more and specify. It should help those entities which make significant use of cryptocurrencies, in which case presenting them as stock is not suitable or adequate. The solution should be compatible with the IFRS in order to ensure comparability and limit the need for conversion. The interpretation has not yet been submitted for external consultation.

One topic which we have not mentioned in this article is taxation of cryptocurrencies. That is because taxation has already been discussed in the previous issues. 

Dita Stronová & Martina Hůlová

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