The rise of technology and other forms of digital assets have slowly permeated the way we do things and our lifestyle. As a kid born in the 90s, everything had to be done in person–games, shopping, school, etc. The only thing I remembered that could be done real time with someone far away was a phone call. Now, our smartphones have become like our superpowers. We can do almost anything in an instant through these gadgets.
Kristine Ismael is a Partner at Ismael and Co., CPAs, based in Baguio City. Ismael and Co., CPAs serves a wide range of clientele based in the North of Philippines which are regulated by the Bureau of Internal Revenue, Securities and Exchange Commission, Bangko Sentral ng Pilipinas, Cooperative Development Authority and National Electrification Administration.
Accounting for Cryptographic Assets
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One thing that picks interest for most people nowadays are digital assets, one of which are cryptocurrencies. The pandemic had made more people aware and open to join the cryptocurrency wave. However, there is still a lot of mystery to it. Here in the Philippines, regulators like the Bangko Sentral ng Pilipinas (BSP) have already released some pronouncements to lay down the groundwork to define rules on virtual currency exchanges via BSP Circular No. 944. In fact, there are already several virtual currency exchanges registered under the BSP to offer some form of protection and guidance to its participants. (Read More: Key Takeaways: Philippines Guidelines on Virtual Asset Service Providers (VASPs))
In this article, we aim to uncover how cryptocurrencies held and acquired by an entity are recorded in its financial statements. To this date, there is still no particular standard that refers specifically as to how cryptocurrencies are accounted for. Fortunately, the Philippine Interpretations Committee (PIC) has released PIC Q&A 2019-02 Accounting for Cryptographic Assets such as cryptocurrencies while there is still no specific standard for it.
Cryptocurrencies qualify as an asset when acquired
There are various types of cryptocurrencies which have different characteristics resulting to unique accounting treatments. Generally, cryptocurrencies qualify as an asset when acquired. Assets are defined as a present economic resource controlled by an entity as a result of past events and has the potential to produce economic benefits. So now we know where cryptocurrencies lie in the accounting equation. But which account should it be classified?
Is Cryptocurrency Considered “Cash”?
Could it be cash or another type of asset?
As the term “cryptocurrency” suggests, it might sound like it fits the definition of cash because it represents a form of digital currency. However, cryptocurrency does not have the common characteristics of cash. International Accounting Standards (IAS) 7 defines Cash and Cash Equivalents as cash on hand and demand deposits (cash) or short-term highly liquid investments that are readily convertible to known amounts of cash and which are subject to insignificant changes in value (cash equivalents). Cryptocurrencies are not fiat currency and are still not generally accepted as legal tender. Its changes in value are highly volatile. Although there are cryptocurrencies which are more stable in value, most cryptocurrencies fluctuate in value significantly. This year alone, the value of one bitcoin ranged from around 1.3 million pesos to 3 million pesos from January to August.
If it does not meet the definition of cash and cash equivalent, where does it fit in?
Consistent with the PIC Q&A 2019-02, the closest definition where cryptocurrencies conform is an Intangible Asset.
Cryptocurrency as an Intangible Asset
According to IAS 38 Intangibles, intangible assets are non-monetary assets which are without physical substance and arise from contractual or other legal rights or are identifiable, as can be sold, exchanged or transferred individually. First, they are non-monetary as they do not meet the definition of monetary assets in IAS 38.8 being “assets to be received in fixed or determinable amounts of money”. This also corresponds with IAS 21, The Effects of Changes in Foreign Exchange Rates, which states that an essential feature of a non-monetary asset is the absence of a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency.
Having said that, there may be entities who would employ strategies to manage the risks brought about by cryptocurrencies and may enter into certain contracts to buy or sell cryptocurrencies in the future or other contracts that settle in cash based on movements in particular cryptocurrency. In that case, it may meet the definition of a derivative and be subject to financial instruments accounting.
What if the holder qualifies as a broker-trader and the intention for holding cryptocurrencies is to sell them in the near future?
Cryptocurrency as Inventory to be Measured
The cryptocurrencies held by a broker-trader in this situation qualifies as inventory to be measured under IAS 2 Inventories. IAS 2 does not require inventories to have physical form. The basic property of inventory is that they are held for sale in the ordinary course of business. An entity qualifies as a broker trader if the entity actively buys and sells cryptocurrencies with the intention of selling in the near future generating a profit from the fluctuations in prices.
With all these possibilities, it is important to understand the nature of the cryptocurrency and the intent or purpose of an entity for holding cryptocurrency in its preparation and presentation of its financial statements.
This article is published on BitPinas: Cryptocurrency Accounting in the Philippines Guide