Cryptocurrencies: Considerations for Treasuries

4 Cryptocurrencies: Considerations for Treasuries Once an organization has accepted and collected crypto, the primary question becomes whether to maintain crypto as part of the company’s ordinary holdings. While reporting will be based on whether an agent or direct model is chosen, for the purposes of this paper, we will focus on the scenario where cryptocurrency is held as an asset. This is an important question for a treasury to answer as both their policy and accounting practice will require them to classify each asset on the balance sheet. We have outlined our general understanding of the International Accounting Standard (IAS) standards. The three standards we will consider are from the International Financial Reporting Standards Foundation. IAS 7 covers cash and cash equivalents, IAS 39 deals with presentment of financial instruments, and IAS 38 which provides for intangible assets. Crypto is not cash or a cash-equivalent What is important with IAS 7 is the definition of cash and cash equivalents. This standard defines cash as cash on hand and demand deposits. Cash equivalents are defined as short-term, highly liquid investments that can be readily converted to known amounts of cash and hold insignificant amounts of risk of change in value. 1 There is general consensus that cryptocurrencies do not meet these standards due to their high levels of volatility. IAS 39 is another relevant standard for consideration. It defines financial instruments as financial assets, financial liabilities and equity instruments. Crypto is unlikely to be seen as a financial asset under this definition as it is, again, narrow. It includes only cash, an equity instrument or a contractual right to exchange financial assets / liabilities or equities. Therefore, as with IAS 7, IAS 39 does not neatly fit crypto given the definition of cash and it is unlikely to qualify as an equity or contractual right.” Crypto as an intangible asset IAS 38 defines an intangible asset as “an identifiable non- monetary asset without physical substance.” 2 Cryptocurrencies fit the bill for this definition, as they are digital and therefore do not have physical substance, and are identifiable non- monetary assets, (i. e., crypto can be traded on an exchange and converted into fiat). This classification is how many exchanges and crypto companies currently account for crypto. In some circumstances, it may be argued that cryptocurrency could also be classified as inventory under IAS 2, which is an exception made under IAS 38. 3 While we don’t go into detail on stablecoins in this report, it is worth noting that at this stage they are likely to be classified with other crypto as “intangibles” until proven otherwise. Valuing crypto under IAS 2 and IAS 38 The methodologies for valuing crypto vary between intangible assets and inventory. Inventory is measured by recognizing value as either cost or net-realizable value, whichever is lower. There are, however, exceptions. For instance, this does not apply to commodity broker dealers who likely value inventory at fair value, less cost to sell. For intangible asset valuation, especially relevant for organizations where crypto is not held for trading, there are two potential valuation models — the cost model and the revaluation model. Under the cost model, the valuation method is cost less accumulated amortization, less impairment. The revaluation model method is based on an active market where you can revalue the cryptocurrency to its fair value and account for profits or losses. At present, most organizations we have consulted are taking a conservative approach, valuing cryptocurrency at its lowest value over the period to account for impairment, and not realizing gains until a position is sold and converted to fiat. Only impairments and losses will be recognized until liquidation which may result in earnings volatility. Accounting for Crypto “The accounting hasn’t caught up to the reality of how corporate Treasuries are starting to evaluate and invest in Bitcoin. As Bitcoin isn’t considered cash or a cash equivalent, we are forced to account for it as an intangible asset. As a result, we are required to mark it down to it’s lowest point over any given time frame and aren’t able to mark it up until it is sold. Unfortunate, but we’re hopeful the accounting catches up.” Timothy Murphy Head of Finance Operations, Real Estate and Treasurer — Square 1 https://www.ifrs.org/issued-standards/list-of-standards/ias-7-statement-of- cash-flows/ 2 https://www.grantthornton.global/globalassets/1.-member-firms/global/ insights/article-pdfs/ifrs/ifrs-viewpoint-9---accounting-for-cryptocurrencies-- the-basics.pdf 3 https://www.grantthornton.global/globalassets/1.-member-firms/global/ insights/article-pdfs/ifrs/ifrs-viewpoint-9---accounting-for-cryptocurrencies-- the-basics.pdf