Recent and emerging issues - Crypto assets and digital repor...

Learning Outcomes

After reading this article, you will be able to explain the accounting challenges and approaches relating to crypto assets such as cryptocurrencies and tokens, including how to determine their recognition, classification and measurement under IFRS. You will also learn about reporting considerations in the digital era, including regulatory expectations and digital disclosures, as relevant to the Strategic Business Reporting (SBR) exam.

ACCA Strategic Business Reporting (SBR) Syllabus

For ACCA Strategic Business Reporting (SBR), you are required to understand how recent and emerging digital issues impact financial reporting. This article focuses on the following syllabus areas:

• Discussing the accounting implications of the adoption of new accounting standards, including digital assets.
• Evaluating and applying existing standards to contemporary issues such as digital assets, including cryptocurrencies and initial coin offerings.
• Discussing issues in financial reporting when dealing with new technology and digital disclosures.
• Appraising the usefulness and limitations of financial reporting in a digital context.

Test Your Knowledge

Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.

1. Which IFRS standard currently most closely applies to accounting for cryptocurrencies held as inventory?
   1. IAS 2
   2. IAS 7
   3. IFRS 9
   4. IAS 32

2. True or false? Cryptocurrencies automatically meet the definition of 'cash or cash equivalents' under IAS 7.

3. When recording an initial coin offering (ICO), what determines whether a liability or equity is credited in the issuer's books?

4. List two digital reporting considerations that entities must address in an increasingly digital business environment.

Introduction

The growth of digital assets and rapid technological change have raised new questions for financial reporting. Entities may now hold or issue crypto assets, such as cryptocurrencies or tokens created in initial coin offerings (ICOs). Meanwhile, users’ expectations for digital disclosures are changing, and regulators are responding with updated frameworks. For ACCA SBR candidates, it is essential to understand how existing standards can be applied to these new issues and where professional judgement is required.

Crypto Assets: Definitions and Accounting Issues

Crypto assets are digital representations of value secured by cryptography. They may be used for trading, investment, or access to a product or service. Common types include cryptocurrencies (such as Bitcoin or Ethereum) and tokens issued in ICOs.

Key Term: cryptocurrency
A digital currency that uses cryptography for security and operates independently of a central authority.

Key Term: initial coin offering (ICO)
A fundraising method in which tokens are issued by an entity in exchange for cash or other assets, often granting holders certain rights.

Crypto assets present reporting challenges because there is currently no specific IFRS standard directly covering them. Preparers must reference the Conceptual Framework and consider in-scope standards such as IAS 2, IAS 38, IAS 7, and IFRS 9.

Classification

The correct classification of a crypto asset depends on its nature and the business purpose for holding it. Common possibilities include:

• Inventory (IAS 2): If held for sale in the ordinary course of business (e.g. trading).
• Intangible asset (IAS 38): If it is an identifiable, non-monetary asset without physical substance and not held for trading.
• Financial asset (IFRS 9): If contractual rights to cash or another financial asset exist (rare for typical cryptocurrencies).

Crypto assets do not typically meet the definition of cash or cash equivalents under IAS 7 because they are not widely accepted as a medium of exchange, and their values are highly volatile.

Measurement

• If inventory under IAS 2: Measured at the lower of cost and net realisable value.
• If intangible asset under IAS 38: Measure at cost, or revalued to fair value if an active market exists. Subsequent acquisition costs are subject to amortisation and impairment.
• Fair value measurement (IFRS 13): Used if a suitable market exists and revaluation model is permitted.

Gains or losses are presented in profit or loss unless revaluation model changes require recognition in other comprehensive income.

Presentation and Disclosure

Crypto assets should be presented according to their classification. Sufficient disclosure is needed to provide transparency, particularly regarding measurement uncertainty and risk.

Key Term: fair value
The price that would be received to sell an asset in an orderly transaction between market participants at the measurement date.

Worked Example 1.1

Scenario:
A software company holds a portfolio of Bitcoin and Ether for resale. Should these be classified as cash equivalents, financial assets, inventory, or intangible assets?

Answer:
The cryptocurrencies are not cash or cash equivalents (not generally accepted as legal tender, highly volatile), nor are they financial assets (they do not provide a contractual right to receive cash). As they are held for trading, they are inventory under IAS 2.

Worked Example 1.2

Scenario:
A retailer accepts payments in cryptocurrency and holds a balance of tokens for possible future use as payment for supplies. The tokens are not traded for profit. How should the retailer classify them?

Answer:
As the retailer does not hold the tokens for active trading, and the tokens are not physical items, they are accounted for as intangible assets under IAS 38.

Exam Warning

Crypto assets are rarely, if ever, cash or cash equivalents. Always justify your classification with reference to the actual rights and usage in your scenario.

Initial Coin Offerings (ICOs)

In an ICO, an entity issues tokens in exchange for cash or other assets. The accounting treatment for the issuer depends on the contractual rights attached to the tokens. Key questions:

• Do the tokens grant holders equity in the company?
• Are they a financial liability (e.g., right to future repayment)?
• Do they provide access to goods or services (i.e., deferred revenue)?

If the token conveys a right to goods or services, revenue is recognised under IFRS 15 when performance obligations are satisfied. If the token is classified as equity or a financial liability, IAS 32 applies.

Worked Example 1.3

Scenario:
An entity issues 1,000,000 tokens in an ICO. The tokens entitle holders to a share of profits but can be repurchased by the entity at a fixed price. How should this be accounted for?

Answer:
If the issuer is obliged to pay cash to the token holders, the arrangement is a financial liability under IAS 32, initially measured at fair value.

Revision Tip

When analysing tokens, read the terms carefully. Classify based on substance, not just name or intention.

Digital Reporting and Disclosure Considerations

Technology has also changed how entities present, publish, and share financial information. New requirements and stakeholder expectations include:

• Regulatory expectations: Increasing focus on digital filing, structured data (e.g., XBRL), and prompt disclosure.
• Data security and privacy: Entities must ensure confidential data protection, especially with cloud-based systems.
• Ethics: Accountants must apply professional competence and due care when managing digital records or reporting digital assets. Knowledge of new risks (e.g., cyber risks, AI bias) is essential.

Entities must ensure that disclosures about digital assets, value measurement, and risks are provided in sufficient detail for users. This is especially important when dealing with volatile and unregulated asset classes such as crypto assets.

Key Term: digital reporting
The electronic preparation, submission, and dissemination of financial information, often using structured or standardised digital formats.

Limitations and Professional Judgement

Current IFRS standards do not address every issue presented by crypto assets and digital innovations. Preparers must apply the Conceptual Framework, exercise judgement, and disclose their accounting policies and judgements clearly—especially when standards do not prescribe a specific approach.

Summary

The accounting for crypto assets and digital transactions is an emerging issue. Existing IFRS standards such as IAS 2 and IAS 38 may be applied, but judgement is required and disclosure is critical. Entities issuing or receiving tokens must analyse the terms and classify accordingly. Digital reporting brings new requirements for timely, clear, and secure financial disclosure. Accountants must stay current and vigilant as digital asset markets and reporting expectations develop.

Key Point Checklist

This article has covered the following key knowledge points:

• Define and classify crypto assets according to current IFRS standards.
• Identify when crypto assets should be treated as inventory, intangible assets, or other items.
• Explain accounting approaches for initial coin offerings.
• Recognise digital reporting and ethical considerations for SBR.
• Apply the Conceptual Framework and exercise professional judgement where IFRS guidance is not specific.

Key Terms and Concepts

• cryptocurrency
• initial coin offering (ICO)
• fair value
• digital reporting