Cryptocurrency Accounting

Cryptocurrency

Encryption itself is the process of generating codes to keep information confidential. In contrast to traditional centralised banking systems, cryptocurrencies employ decentralized control through a public ledger called a blockchain. This allows two parties to transact directly without an intermediary, saving time and money.

Bitcoin

Bitcoin was the first decentralized cryptocurrency, with its first block created in 2009. It currently has the highest market value. Many other cryptocurrencies have since been developed, with over 1,600 now in existence.

Ethereum

The second largest cryptocurrency by market value is Ethereum. Like Bitcoin, Ethereum utilizes a blockchain network. The main difference is Bitcoin focuses on tracking currency ownership through independent transaction verification known as proof-of-work, while Ethereum’s software enables smart contracts – self-executing contracts encoded by developers. This allows apps and technologies incompatible with Bitcoin.

Accounting for Cryptocurrency

Ind AS 7

Statement of Cash Flows states cash equivalents are short-term, highly liquid investments readily convertible to cash with insignificant risk of value changes. Cryptocurrencies do not meet this definition due to considerable price volatility.

Ind AS 32 & 119 Financial Instruments

Cryptocurrencies are not equity instruments, contracts settled in equity, or cash. Possessing cryptocurrency does not contractually entitle the holder to receive cash or other online accounting services in India. Therefore cryptocurrencies do not meet the definition of a financial asset. Ind AS 119 specifically excludes gold bullion, noting no inherent contractual right to receive cash despite being highly liquid. The same logic applies to cryptocurrencies.

Ind AS 40

Ind AS 40 Investment Property defines investment property as land, buildings, or parts thereof held to earn rentals or for capital appreciation. While cryptocurrencies are held for capital appreciation, classifying them as investment property measured at fair value through profit and loss is inappropriate since they are not physical assets.

Ind AS 38

Ind AS 38 Intangible Assets defines an intangible asset as an identifiable non-monetary asset without physical substance. Cryptocurrencies meet this definition:

• Identifiable – Cryptocurrencies are tradable, meeting this requirement.
• Non-monetary – Cryptocurrencies have unpredictable value subject to supply and demand, not fixed or determinable amounts of money. Therefore they are non-monetary.
• Without physical substance – Cryptocurrencies are digital with no physical form.

Conclusion

In most cases, cryptocurrencies are appropriately classified as intangible assets per Ind AS 38, measured at cost or revaluation if an active market exists. In limited cases for entities acquiring cryptocurrencies to sell in the near term for profit, Ind AS 2 Inventories applies, requiring measurement at fair value less costs to sell.