by Akanksha Chandra 14 Apr 2022
As IFRS does not have any specific standard for crypto assets, according to experts, the IAS 38 Intangible assets might be more appropriate to use here as properties of a virtual currency resemble other typical Intangible assets.
In the DMCC webinar also, it was discussed how we could account for cryptos the same way as other intangible assets if it meets our requirements, as there is no certain accounting standard issued for this separately.
IAS 38 states that an asset is identifiable if separable or arises from contractual or other legal rights. An asset is divisible if it can be separated or divided from the entity and sold, transferred, licensed, rented, or exchanged, either individually or together with a related contract, identifiable asset, or liability.
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.
Thus, it appears that cryptocurrency meets the definition of an intangible asset in IAS 38 as it is capable of being separated from the holder and sold or transferred individually and, in accordance with IAS 21, it does not give the holder a right to receive a fixed or determinable number of units of currency.
IAS 38 allows intangible assets to be measured at cost or revaluation. Using the cost model, intangible assets are measured at cost on initial recognition and are subsequently measured at cost less accumulated amortization and impairment losses. Using the revaluation model, intangible assets can be carried at a revalued amount if there is an active market; however, this may not be the case for all cryptocurrencies. The same measurement model should be used for all assets in a particular asset class. If there are assets for which there is no active market in a type of assets measured using the revaluation model, these assets should be calculated using the cost model.
1]“IAS 38 states that a revaluation increase should be recognized in other comprehensive income and accumulated equity. However, a revaluation increase should be recognized in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognized in profit or loss. A crypto coin evaluation loss should be recognized as profit or loss. However, the decline shall be recognized in other comprehensive income to the extent of any credit balance in the revaluation surplus in respect of that asset. It is unusual for intangible assets to have active markets. However, cryptocurrencies are often traded on an exchange, and therefore it may be possible to apply the revaluation model.
Where the revaluation model can be applied, IFRS 13, Fair Value Measurement, should be used to determine the fair value of the cryptocurrency. IFRS 13 defines an active market, and judgment should be applied to determine whether an active market exists for particular cryptocurrencies. As there is daily trading of Bitcoin, it is easy to demonstrate that such a market exists. A quoted market price in an active market provides the most reliable evidence of fair value and is used without adjustment to measure fair value whenever available. In addition, the entity should determine the principal or most advantageous market for cryptocurrencies.
An entity will need to assess the cryptocurrency’s useful life. It appears cryptocurrencies should be an indefinite life for IAS 38. An intangible asset with an unlimited useful life must be tested annually for impairment.
In certain circumstances, and depending on an entity’s business model, it might be appropriate to account for cryptocurrencies in accordance with IAS 2, Inventories, because IAS 2 applies to inventories of intangible assets. IAS 2 defines inventories as assets:
For example, an entity may hold an evaluation for cryptocurrency in the ordinary course of business, and if that is the case, then cryptocurrency could be treated as inventory. Usually, this would mean the recognition of lists at a lower cost and net realizable value. However, if the entity acts as a broker-trader of cryptocurrencies, IAS 2 states that their stocks should be valued at less cost to sell. This type of inventory is principally acquired to sell soon and generate a profit from fluctuations in price or broker traders' margin. Thus, this measurement method could only be applied in very narrow circumstances where the business model is to sell cryptocurrency shortly to generate a profit from fluctuations in price.
As there is so much judgment and uncertainty involved in recognizing and measuring cryptocurrencies, a certain amount of disclosure is required to inform users in their economic decision-making. IAS 1, Presentation of Financial Statements, requires an entity to disclose judgments that its management has made regarding its accounting for holdings of assets, in this case, cryptocurrencies if those are part of the judgments that had the most significant effect on the amounts recognized in the financial statements. Also, IAS 10, Events after the Reporting Period, requires an entity to disclose any material non-adjusting events. This would include whether changes in the fair value of cryptocurrency after the reporting period are of such significance that non-disclosure could influence the economic decisions that users of financial statements make based on the financial statements.
So, accounting for crypto in Dubai is not as simple as it might first appear. As no IFRS standard currently exists, reference must be made to existing accounting standards (and perhaps even the Conceptual Framework of Financial Reporting). SBR candidates should be prepared to adopt this approach in an exam situation because it allows them to substantiate their conclusion, which is an approach that employers will expect in practice.”
UAE has started an initiative to accommodate Cryptocurrencies, following the lead of many successful economies worldwide.
UAE’s initiative to move towards blockchain for digital transactions employing ‘Blockchain Strategy 2021’ aims to “capitalize on the blockchain technology to transform 50 percent of government transactions into the blockchain platform by 2021.”1