This blog was first posted by Eddy James in January 2017 on the Financial Reporting Faculty’s blog.
A few years ago there was a lot of talk about Bitcoin, the fledging cryptocurrency that was threatening to take the world by storm. So much so that we included a bluffer’s guide to it in the Financial Reporting Faculty’s journal, By All Accounts, back in July 2014.
You don’t hear quite as much about Bitcoin as you once did but it certainly hasn’t gone away. Quite the opposite in fact. Recent reports suggest that over 100,000 retailers worldwide now accept Bitcoin. It seems that something that was once widely regarded as the currency of choice of drug dealers and arms traffickers has gone mainstream, particularly among tech savvy millennials.
A lack of guidance
It’s therefore, perhaps, not that surprising that we are starting to hear more questions about how businesses should account for holdings of Bitcoin or transactions denominated in it. As you’d probably expect, there’s no official guidance on accounting for cryptocurrencies at this stage, so you need to go back to first principles to work out what is appropriate. While what follows is some personal thoughts on the matter rather than a definitive guide to accounting for such transactions, hopefully it will prove useful and help to stimulate some debate.
People often talk about Bitcoin as if it was a form of cash or perhaps a cash equivalent. Treating Bitcoin as just another foreign currency certainly has its attractions as it would make the accounting fairly straightforward. But it doesn’t feel quite right to me as although Bitcoins are readily convertible to known amounts of cash at any point in time, they aren’t actually cash themselves. Moreover, the level of volatility in their value suggests that they aren’t cash equivalents either as there is a more than insignificant risk of changes in value. That’s not to say that they won’t at some stage meet the definition of cash or cash equivalents. But I don’t think we’re quite there yet.
A possible solution?
So if they’re not cash or cash equivalents, then what are they? Could they be viewed as some other type of financial asset? Probably not, as I don’t think they quite meet that definition either. They seem more like gold or another commodity. In which case, holdings of Bitcoin should probably be treated as either inventory or intangible assets depending on the business model of the entity that holds them.
If this were the case, the Bitcoin would need to be initially measured at either the purchase price or at the fair value of goods or services provided at the time of the transaction. In most cases they’d then be subsequently measured at cost less any impairment. However, if the entity was a Bitcoin trader it would make more sense to subsequently measure its Bitcoin at fair value through profit or loss.
However the Bitcoin is accounted for, I’d expect the entity to make appropriate disclosures if its holdings were material or if it had a significant volume of Bitcoin-denominated transactions. Such disclosures should, at a minimum, explain why the entity is dabbling in Bitcoin, how doing so fits into its business model and how the related risks are being mitigated.
As noted above, these are only tentative thoughts. Practice will, no doubt, evolve over time and if there’s a lack of consistency standard-setters may ultimately turn their attention to accounting for cryptocurrencies. In the meantime, the Financial Reporting Faculty will continue to monitor developments and would love to hear from you if you’ve got any thoughts on the subject. You can contact us at firstname.lastname@example.org
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