Currently, the accounting treatment for cryptocurrencies is one of the most debated issues among financial professionals. The main reason for this uncertainty is the absence of formal guidance that deals with the classification of cryptocurrencies in the US GAAP and the IFRSs.

Under these circumstances, companies that possess a large amount of digital currency (mainly Bitcoin) in their assets are left with the single choice of following the general industry practices. However, in July 2018, an opinion on the classification of cryptocurrencies was published by one of the “Big Four” accounting firms. In accordance with the currently available principles and standards, cryptocurrencies are likely to be classified in one of the following groups of assets

• Cash equivalents
• Resources
• Financial instruments
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Assets that are classified as cash and cash equivalents are characterized with being short-term, highly liquid, easily convertible into predetermined cash amounts, and are subject to negligible risk of fluctuation in value. However, according to the published opinion, cryptocurrencies cannot be considered as cash and cash equivalents, because they lack some of the common properties of money. Cryptocurrencies are not issued by any sovereign authority, are not an explicitly accepted form of payment, are not capable of setting prices for goods and services directly, and are not easily converted into predetermined cash amounts since they have a significant risk of fluctuation in value.

Inventories, on the other hand, are assets that are held to generate future sales during the ordinary course of business. Therefore, cryptocurrencies might be classified as an inventory item in certain cases (i.e., brokers) or financial instruments (i.e., investment companies). However, according to the published opinion, cryptocurrencies do not satisfy the definition of financial assets since they do not represent an ownership right in any entity, and not considered a contract that results in a future right or liability.

The published opinion concludes that by most entities, cryptocurrencies are plausible to be treat as intangible assets.

Globally, the electric vehicles company “Tesla” is the largest company to invest in cryptocurrencies.

In its 10-K filing for the year ended December 31, 2020, Tesla stated that it had recorded the Bitcoin cryptocurrency in its assets as an intangible asset with an indefinite maturity. Representing digital currencies, those assets that are initially recognized by Tesla at cost, are subject to frequent tests for impairment every three months. Thus, cryptocurrencies are stated at their “initial cost less the accumulated impairment losses” in the company’s consolidated statement of financial position. On the other hand, Tesla will not reverse the impairment of these assets in the event of a further rise in the Bitcoin price. However, since Bitcoin is highly volatile, in our opinion, the impairment test should be applied more frequently.

Thus, any entity’s financial statements are susceptible to significant changes based on selecting the respective accounting policies that deal with the classification of cryptocurrencies, due to the large fluctuation in their market value.

Author of the article: IFP Senior Auditor of the Company: Kevork Agop

Sources:

• White, Nicola M. “Tesla Bitcoin Bet Exposes Limits of Crypto Accounting Rules”, Bloomberg Tax, February 9, 2021.
• Financial Reporting Alert 18-9. “Classification of Cryptocurrency Holdings”, Deloitte, July 9, 2018.
• Sterley, Andre. “Cryptoassets: Accounting for an Emerging Asset Class”, CPA Journal, June 2019.
• IFRS. “IAS 7 Statement of Cash Flows”.

United States Securities and Exchange Commission, Tesla, Inc. Form 10-K.