FinTax Crypto Asset Accounting and Auditing Series (I): Accounting Classification and Treatment of Crypto Assets
As the crypto asset market matures, an increasing number of enterprises and individuals are engaging in transactions using crypto assets, and more investors are choosing to allocate crypto assets in their portfolios. However, due to the characteristics of crypto assets, such as significant price volatility, on-chain transaction anonymity, and digital asset forms, traditional accounting and auditing standards face challenges when dealing with crypto assets. For instance, how should enterprises classify crypto assets and apply appropriate accounting treatment? How do different regulatory bodies reconcile variations in accounting standards?
Additionally, during the processes of tokens’ ICO, IDO and IEO, various widely criticized issues exist, such as non-transparent financial and accounting disclosures by project teams and the lack of effective audits. These problems not only lead to financial losses for individual investors but also hinder the long-term healthy development of the crypto market.
In response, FinTax has launched this series, aiming to provide insights and recommendations from the perspectives of financial management, accounting treatment, information disclosure, and project auditing. By integrating international accounting and auditing regulations with practical case studies, the series seeks to explore a balanced approach between decentralized technology and centralized regulation.
As the first article in this series, this article will begin with the fundamental research, summarizing how different international organizations and countries classify crypto assets and the corresponding accounting treatment. It will also briefly analyze related challenges and countermeasures, laying the foundation for subsequent articles in the series.
1. Classification of Crypto Assets by Different International Organizations and Countries
From an international perspective, due to differences in economic development levels and the evolution of crypto asset markets, countries have varied approaches to crypto asset classification and accounting treatment. Generally, the accounting treatment of crypto assets is based on existing accounting frameworks, providing principle-based guidance while incorporating necessary adjustments to these frameworks.
1.1 International Accounting Standards Board (IASB) Perspective
In 2019, the International Accounting Standards Board (IASB) explicitly outlined the classification and subsequent measurement of crypto assets in its published documents. During initial recognition, IASB stated that crypto assets do not qualify as financial assets, nor are they considered cash or cash equivalents. Their classification depends on the enterprise’s purpose for holding them, and they may be categorized as either inventory or intangible assets.
For subsequent measurement, if a crypto asset is classified as inventory, it should be measured at the lower of cost or net realizable value to ensure the accuracy of inventory valuation. If classified as an intangible asset, it should be treated as an intangible asset with an indefinite useful life. This means that its amortization period is not fixed, and the enterprise must periodically assess and recognize any impairment losses to reflect actual changes in the value of the intangible asset.
1.2 Financial Accounting Standards Board (FASB) Perspective
In March 2023, the Financial Accounting Standards Board (FASB) released an exposure draft regarding the accounting treatment and disclosure of crypto assets. In this draft, FASB explicitly stated that crypto assets meeting specific criteria (such as Bitcoin, Ethereum, etc.) should be classified as intangible assets with an indefinite useful life.
Regarding subsequent measurement, FASB introduced changes to the valuation method for crypto assets, shifting from an impairment test model to fair value measurement. This means that changes in the fair value of crypto assets will directly impact a company’s current-period profit and loss. Additionally, FASB proposed that enterprises must provide detailed disclosures in their financial statements regarding their holdings of significant crypto assets. These disclosures should include the asset’s name, original cost, current fair value, and quantity held. This initiative aims to enhance financial transparency and comparability, enabling investors and stakeholders to better understand the value and risks associated with corporate crypto assets.
1.3 Accounting Standards Board of Japan (ASBJ) Perspective
In March 2018, the Accounting Standards Board of Japan (ASBJ) issued Practical Guidance No. 38, providing specific accounting treatment guidelines for crypto assets under the framework of the Payment Services Act. ASBJ’s classification and treatment principles for crypto assets are as follows:
● Initial Recognition: ASBJ stated that crypto assets do not fall under traditional accounting categories such as financial assets, inventory, or intangible assets. Therefore, it does not recommend applying existing accounting standards directly. Instead, it proposes treating crypto assets as a unique asset class with dedicated accounting regulations.
● Subsequent Measurement: ASBJ introduced two different treatment approaches depending on market activity. For crypto assets with an active market, ASBJ advocates for fair value measurement, with the difference between fair value and book value recognized in profit or loss. For crypto assets without an active market, ASBJ suggests using acquisition cost as the basis for subsequent measurement.
1.4 Perspectives of Other Countries
● Belarus: According to the standards issued by the Ministry of Finance, crypto assets are classified as goods or finished products.
● South Korea: The country currently suggests classifying crypto assets as current assets, while actively exploring the possibility of reclassifying those held for more than one year as non-current assets to better reflect their long-term investment value.
● Australia: The Australian Accounting Standards Board classifies crypto assets as both intangible assets and commodities, reflecting its recognition of the dual nature of crypto assets in accounting practice.
In summary, the classification of crypto assets varies across countries. These different classifications reflect the unique perspectives and regulatory strategies that nations adopt in response to this emerging asset class.
2. Exploration of Different Accounting Treatments for Crypto Assets
2.1 Accounting Treatment as Inventory
Some perspectives suggest that if a company holds crypto assets in the course of its daily operations for the purpose of selling them, they may be classified as inventory. For businesses primarily engaged in mining, the crypto assets obtained through mining and immediately available for transfer may also be recognized as inventory.
In terms of measurement, inventory should be initially measured at cost and subsequently measured at the lower of cost or net realizable value. However, this approach has limitations. The market price of crypto assets is more relevant in active markets, and the historical cost method does not fully reflect the risks and value of such assets. Additionally, there is controversy over whether crypto assets held for trading to gain price differences meet the definition of inventory. Unlike retail goods, crypto assets held for speculative purposes do not align with the definition of inventory. As a result, the inventory-based accounting treatment for crypto assets is not commonly adopted.
2.2 Accounting Treatment as Financial Assets
Given the high price volatility of crypto assets and the availability of public market quotations, some argue that they should be treated as financial assets. If classified as financial assets, they should, in theory, be accounted for under financial instrument-related accounting standards. However, since crypto assets do not represent a contractual relationship, and holders have no direct contractual agreements with other parties, this poses a challenge to their classification as financial assets.
Furthermore, crypto asset transactions operate outside independent financial regulatory systems and differ from traditional financial asset trading mechanisms. As a result, crypto assets do not fully meet the definition and measurement requirements of financial assets, making this classification controversial.
2.3 Accounting Treatment as Intangible Assets
Countries such as the United States classify crypto assets as intangible assets with an indefinite useful life. This classification is based on the fact that crypto assets have no physical form, meeting the definition of “intangibility.” Additionally, they can be separated from the holder, bought, or sold independently, making them identifiable. Since holders expect to derive economic benefits through transactions, crypto assets meet the definition of assets.
Due to value fluctuations and the lack of an entitlement to receive a fixed or determinable amount of monetary units, crypto assets are considered non-monetary assets. Initial measurement is typically based on historical cost, while subsequent measurement may adopt the fair value model, in which case International Financial Reporting Standard (IFRS) 13 can be referenced. Crypto assets with an indefinite useful life are not subject to amortization but must undergo an annual impairment test.
Accounting for crypto assets as intangible assets is currently one of the most widely accepted approaches and is applicable to most mainstream crypto assets, such as Bitcoin and Ethereum.
2.4 Accounting Treatment as Cash or Cash Equivalents
Cash and cash equivalents primarily include cash, bank deposits, and other assets that exist in monetary form, serving as the core representation of a company’s liquidity. Since crypto assets perform some monetary functions, such as storage, payment, and exchange, some argue that they should be classified as a substitute for cash or cash equivalents in accounting treatment.
Under this approach, crypto assets are recorded based on the actual cash paid or received. If classified as cash equivalents, any difference between the realization value and the book value is not included in profit or loss but disclosed as a net amount. However, the significant price volatility of crypto assets, which is influenced by regulatory policies, speculative activities, and market dynamics, contrasts sharply with the relative stability of traditional cash and cash equivalents.
Therefore, equating crypto assets directly with cash and cash equivalents has been widely questioned. Additionally, there is no clear legal support for this classification. Some propose treating crypto assets as foreign currencies, but the lack of a sovereign nation or international organization backing crypto asset trading platforms makes it difficult to ensure the reliability of financial information. This further challenges the legitimacy of treating crypto assets as foreign currency.
2.5 Accounting Treatment as Other Current Assets
Since the existing accounting classification system does not perfectly accommodate crypto assets, some suggest categorizing them under “Other Current Assets.” Under accounting frameworks, “Other Current Assets” exclude categories such as inventory, accounts receivable, other receivables, notes receivable, short-term investments, and cash. Current assets generally refer to assets expected to be realized within one year.
For measurement purposes, if crypto assets are considered short-term investments, those measured at amortized cost should be amortized using the effective interest method, while those measured at fair value should be periodically reassessed, with value fluctuations recognized in profit or loss or comprehensive income.
However, corporate intentions for holding crypto assets vary, and both short-term trading and long-term holding involve uncertainties. If a company cannot ensure realization within one year, classifying crypto assets as “Other Current Assets” may not be logical. This classification is particularly problematic for businesses engaged in mining, where crypto assets are held for various purposes, including long-term investment and trading. The difficulty in distinguishing between these purposes raises further questions about the appropriateness of this treatment.
3. Outlook on Accounting Rules and Practices for Crypto Assets
In the future, the accounting treatment of crypto assets will face numerous challenges. As an emerging asset class, the complexity and particularity of crypto asset accounting cannot be overlooked. However, blockchain and cryptographic technologies are expected to drive transformations in accounting practices. For example, with the widespread adoption of blockchain technology, the transparency and traceability of accounting information will be significantly enhanced, helping to reduce accounting fraud and information asymmetry while improving the quality and reliability of financial reporting. Additionally, smart contracts offer new tools and methods for accounting treatment, facilitating the automation and intelligence of accounting processes.
We believe that the accounting rules and practices for crypto assets will develop in the following directions:
● Gradual Improvement of Accounting Standards
As the crypto asset market continues to evolve, relevant accounting standards and regulations will gradually be refined. This will provide clear guidance and regulatory frameworks for crypto asset accounting treatment, reducing risks and uncertainties in financial reporting.
● Integration of Technological Innovations
The integration of advanced technologies such as blockchain and artificial intelligence will introduce new solutions for crypto asset accounting. For example, blockchain technology can enable real-time recording and verification of accounting data, while artificial intelligence can enhance automation and intelligence in accounting processes.
● Strengthened Cross-Disciplinary Collaboration
The accounting treatment of crypto assets involves multiple disciplines, including accounting, law, and finance. In the future, cross-disciplinary collaboration will be further strengthened to promote the development and innovation of crypto asset accounting practices.
● Clarification of the Regulatory Environment
With the continued expansion of the crypto asset market, regulatory authorities will enhance oversight of crypto assets. This will help establish clear accounting treatment requirements and standards, reducing compliance risks and costs associated with crypto asset accounting.
References:
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