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Accounting of cryptocurrency is fraught with challenges


Dr Shahnawaz Khan, CEO — Baker Tilly Oman

The Sultanate of Oman is preparing to be part of the global crypto ecosystem by implementing the "Regulatory Framework for Virtual Assets (VAs) and Virtual Assets Service Providers (VAPs)" (the framework).

While the Capital Market Authority (CMA) initiated the process of drafting and implementing the framework, a new challenge is approaching in the form of accounting for VA or cryptocurrency in line with the generally accepted accounting principles or International Financial Reporting Standards (IFRS).

A cryptocurrency is a unit of value that is native to a blockchain. It is a means of exchange within the blockchain to incentivise the network of participants to use the blockchain. The cryptocurrencies Bitcoin, Ether, Ripple, and Litecoin are all examples of native cryptocurrencies also known as digital money.

There are no defined rules or IFRS which cover the accounting of cryptocurrency. Some of the possible combinations of accounting for the cryptocurrency are as below:

Can cryptocurrency be recognised as cash and cash equivalents since they are a medium of exchange?

IAS 7 "Statement of Cash Flows" requires any medium of exchange to meet the definitions of cash and cash equivalents to have the following attributes:

• Legal tender in virtually all jurisdictions

• Backed by a government or central bank

• Readily be exchanged for any good or service

• Short-term, highly liquid investments

Cryptocurrency does not have any of the attributes above and hence does not fall within the provisions of IAS 7.

Can cryptocurrency be recognised as a financial instrument?

IAS 32 "Financial Instruments" defines a financial instrument as a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

Cryptocurrency does not fall into the definition of financial assets due to the lack of a contractual relationship that results in a financial asset for one party and financial liability for another entity.

Can cryptocurrency be recognised as an investment property?

IAS 40 "Investment Property" defines investment property as property (land or a building or part of a building or both) held (by the owner or by the lessee under a finance lease) to earn rentals or for capital appreciation or both.

Cryptocurrency does not fall into the definition of property as it has no physical substance.

Can cryptocurrency be recognized as an intangible asset?

IAS 38 "Intangible Assets" defines the three critical attributes of an intangible asset as below:

• Identifiability (non-monetary asset without physical substance)

• Control (power to obtain benefits from the asset)

• Future economic benefits (such as revenues or reduced future costs)

Identifiability- Cryptocurrency has no physical substance and is a non-monetary asset.

Control & Future economic benefits: Cryptocurrency is an asset for sure because the asset is a resource controlled by an entity as a result of a past event from which future economic benefits are expected to flow to the entity.

The evolving nature of cryptocurrencies, coupled with the lack of relevant formal accounting pronouncements, presents complex accounting challenges. Virtual Assets, therefore, requires a detailed understanding of both blockchain ledger technology and relevant accounting concepts. In the absence of further action by accounting standard setters or the CMA, holders of Virtual Assets may be unable to achieve the accounting treatment they consider most appropriate and would account for the Virtual Assets or crypto assets as intangibles or as inventory in line with the provisions of IAS 2 "Inventory" if they are held for trading by the Virtual Assets Service Providers.

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