Methodological contradictions in cryptocurrency accounting under IFRS

In the modern digital economy, cryptocurrency transactions have become a widespread practice for many corporations [16, p. 8669]. Despite regulatory concerns regarding the risks of illicit financial practices associated with digital assets, there are strong grounds to believe that these assets will eventually become an integral medium of exchange and a store of value in the future [10, p. 302]. As with any other business transactions, cryptocurrencies must be recognized and reflected in financial statements [14, p. 456]. To ensure a faithful representation of information for financial statement users, the existence of clear and consistent standards regarding cryptocurrency operations is of critical importance [12, p. 1707].

Although the International Financial Reporting Standards Interpretations Committee (IFRIC) concluded that IAS 38 Intangible Assets [8] and IAS 2 Inventories [6] are applicable to the accounting and disclosure of cryptocurrency holdings, numerous contentious issues remain that require further investigation. Consequently, the objective of this paper is to systematize the theoretical and methodological approaches to cryptocurrency accounting, identify key contradictions, and outline directions for the improvement of financial reporting standards.

In 2019, the IFRIC defined a cryptocurrency as a digital or virtual currency that is recorded on a distributed ledger using cryptography, is not issued by a jurisdictional authority or other party, and does not give rise to a contract between the holder and another party. Cryptocurrencies constitute a subset of digital assets, which are defined as digital representations of value or contractual rights that are created, transferred, and stored on a distributed ledger, and authenticated through cryptography [10, p. 303]. Given that cryptocurrencies represent a significant share of digital assets, this paper limits its scope exclusively to the accounting treatment of cryptocurrencies.

Within the professional community, a consensus exists that cryptocurrency qualifies as an asset, as it satisfies the asset recognition criteria under the IFRS Conceptual Framework: it represents a resource controlled by the entity as a result of past events from which future economic benefits are expected to flow [13, p. 2196]. However, beyond classifying cryptocurrencies as either intangible assets or inventories, ongoing debates persist regarding the feasibility of recognizing these assets as cash or cash equivalents, as well as other financial assets.

The IFRIC concluded that a cryptocurrency inherently meets the definition of an intangible asset, which is defined as an identifiable non-monetary asset without physical substance. Consequently, under normal circumstances, IAS 38 Intangible Assets [8] must be applied to cryptocurrency holdings; however, if an intangible asset is held for sale in the ordinary course of business, IAS 2 Inventories applies instead [6; 9]. Thus, recognizing cryptocurrency as inventory is applicable to broker-traders whose primary business model involves acquiring cryptocurrency for the purpose of near-term resale. In such instances, inventories are measured at fair value less costs to sell. According to researchers, this measurement model accurately reflects the market value of cryptocurrency, thereby ensuring a faithful representation of information for financial statement users [13, p. 2196; 14, p. 471].

Significant contradictions arise when recognizing cryptocurrencies as intangible assets. According to IAS 38, intangible assets must be accounted for using either the cost model (historical cost less any accumulated amortization and impairment losses) or the revaluation model.

Under the cost model, the financial statements reflect only the downward fluctuations in the asset’s value (impairment), while any appreciation in value remains unrecognized. Given the exceptionally high volatility of cryptocurrencies, this measurement model severely distorts the financial reality and impairs the faithful representation of information in financial reporting [14, p. 470; 10, p. 306].

Utilizing the revaluation model for intangible assets strictly requires the existence of an active market, which does indeed exist for major cryptocurrencies [13, p. 2196]. Under IAS 38, if an intangible asset’s carrying amount increases as a result of a revaluation, the increase must be recognized in other comprehensive income (OCI) and accumulated in equity. Conversely, if the asset’s value decreases, the downward adjustment must be recognized in profit or loss.

Some researchers argue that this accounting asymmetry may mislead financial statement users. They contend that reflecting all fluctuations in cryptocurrency value directly through profit or loss would provide more relevant and informative data [10, p. 305]. On the other hand, doing so introduces a risk of heightened volatility in financial reporting metrics due to the inherently unstable nature of cryptocurrency prices [14, p. 459].

Furthermore, significant concerns remain regarding the reliability of the pricing data required for such revaluations. Empirical evidence suggests that in low-liquidity or inactive cryptocurrency markets, the risk of market price manipulation by market participants increases significantly [5, p. 87].

Consequently, it can be argued that researchers largely converge on the view that the current iteration of IAS 38 is inadequate for the accounting of cryptocurrencies. Authors emphasize that when IAS 38 was originally adopted in 2001, cryptocurrencies did not yet exist; thus, the standard fails to account for the unique economic characteristics of these digital assets [12, p. 1711].

The practice of recognizing cryptocurrency as an intangible asset stems primarily from its compliance with the strict criterion of lacking physical substance. In other words, cryptocurrencies are classified under this category simply because their lack of physical form makes them more closely aligned with intangible assets than with any other existing asset class under current frameworks [1, p. 471].

Let us examine alternative approaches to the accounting treatment of cryptocurrencies. In cases where cryptocurrency functions as a unit of settlement -meaning an entity accepts digital currency directly as payment for goods or services, or utilizes it to settle obligations with suppliers — it exhibits the economic characteristics of a financial asset. Furthermore, some scholars argue that recognizing cryptocurrency as cash or cash equivalents would simplify its measurement, applying principles analogous to those used for foreign currency holdings [13, p. 2196].

Although the IFRIC acknowledged the possibility of exchanging cryptocurrencies for goods and services, it concluded that cryptocurrencies do not qualify as cash. This conclusion rests on the premise that digital currencies fail to fulfill the fundamental economic functions of a medium of exchange and a unit of account in pricing mechanisms. Another legal constraint is that cryptocurrencies are not recognized as legal tender in most jurisdictions. Unlike fiat currencies, they are decentralized and operate outside the control of monetary authorities and traditional financial institutions [11, p. 20]. Finally, if cryptocurrency were to be accounted for in the same manner as foreign currency, determining a reliable exchange rate for translation would remain highly problematic due to the market volatility and liquidity concerns discussed above [3, p. 543].

If an entity acquires cryptocurrency strictly for speculative purposes — aiming to resell it at a higher market price — the transaction’s underlying economic substance mirrors that of a financial asset [14, p. 465]. Despite this economic reality, the IFRIC determined that cryptocurrency does not qualify as a financial asset. This is because it fails to satisfy the explicit definition stipulated under IFRS; specifically, it is not cash (as established above), it does not represent an equity instrument of another entity, and it does not give rise to a contractual right to receive cash or another financial asset from a counterparty. Given this structural mismatch between the accounting definition and economic reality, several researchers propose amending IAS 32 Financial Instruments: Presentation. They argue that such changes are warranted under the foundational accounting principle of substance over form [10, p. 309].

Consequently, no standalone IFRS Accounting Standard specifically dedicated to cryptocurrency accounting exists at present. When preparing financial statements, the majority of entities rely on the IFRIC agenda decision, which requires treating cryptocurrencies as either intangible assets or inventory. Despite this guidance, the role of professional judgment remains paramount in cryptocurrency financial reporting. The accounting treatment of cryptocurrency transactions depends on several critical factors, namely: management’s intent regarding the asset’s use, the specific recognition and measurement criteria under current IFRS, and subjective judgment regarding the most faithful representation of financial information.

Taking into account the aforementioned limitations of classifying cryptocurrency as an intangible asset, alongside the projected growth of digital transactions and the continuous evolution of the digital asset ecosystem, there is a compelling need to introduce more specific accounting rules within the IFRS framework. Moreover, given the unique economic characteristics of cryptocurrencies and digital assets, the development of a distinct, standalone standard may ultimately be required. Such a regulatory step would ensure the harmonization of accounting treatments, significantly enhance the comparability of financial statements across corporations, and provide users with more transparent, relevant, and reliable financial data.