Reading time: 6 minutes.
From this article, you will learn:
- What asset class are cryptocurrencies considered to be?
- Do Polish regulations offer a clear-cut definition of crypto-assets?
- What factors decide on including cryptocurrencies in the balance sheet?
Audit Partner at RSM Poland
Not long ago, we had a look at the valuation of fixed assets for impairment, i.e. we briefly discussed the impairment test. The choice of this topic was due to the economic downturn in certain industries. Today, we are going to discuss another area of financial reporting, very popular in recent years, namely cryptocurrencies. How do you recognise and value these virtual assets in your financial statements?
What is the problem with accounting for cryptocurrencies?
For some people, such things as cryptocurrencies or blockchain are merely a needless problem. They treat such virtual assets as something abstract that does not and will not concern them, at least not in the nearest future.
Given that the very idea of cryptocurrencies is so unclear to so many people, we at RSM Poland can only guess how much doubt there must be when it comes to accounting for crypto-assets. To make it easier for investors and accountants to get the balance sheet right, we will try to break down the recognition of ‘this thing’ in the financial statements.
What does the Accounting Act say about cryptocurrencies?
The Accounting Act (AA) does not say much about cryptocurrencies. In fact, we should not demand too much from it: it consists of almost 90 articles, only some of which regulate the keeping and maintaining books of account or auditing of financial statements. As a result, the concept of crypto-assets, cryptocurrencies or crypto-something is unfortunately absent from the AA. Therefore, you need to analyse your crypto-purchases by asking yourself one key question: in what balance sheet item would you like to recognize the crypto-assets you have purchased or in what balance sheet item can you do it?
Assuming this task, first check if you are dealing with an asset that fits the definition set forth in the AA:
- Do you control the cryptocurrency? – Here the answer is simple: if you have both a private key and a public key, you have control over the asset.
- Is the cryptocurrency an asset created by past events, as indicated by the AA definition of an asset? – If you have acquired crypto-assets and you know their value, you can consider that you have met these conditions as well.
Where do cryptocurrencies go on a balance sheet?
If you are an entrepreneur and you are tempted to classify cryptocurrencies as intangible assets, we do not have good news.
Crypto-assets are assets that are held or acquired for the purpose of benefiting from an increase in their value. This means that their role is similar to that of an investment.
Of course, intangible assets can also be part of an investment, but let us analyse the following: are cryptocurrencies property rights, falling under the definition of intangible assets?
If the answer to this question is “yes”: you can go ahead and include your cryptocurrencies in intangible assets … However, other legal regulations in force in Poland, such as the Corporate Income Tax Act, stipulate that income from cryptocurrency trading is considered income from cash capitals or capital gains. This is a fairly recent change, as until 2019 such gains were treated as income from property rights.
Clearly, in the absence of statutory regulations, you have the right to refer to the International Financial Reporting Standards. After all, you are not solely dependent on tax legislation and in case of any doubts you can always check how international standards approach the recognition of crypto-assets.
Investment in digital assets from the accounting perspective
Keeping in mind that cryptocurrencies can be classified as investments, can you consider cryptocurrencies as investments and recognise them as investments in real estate or other tangible assets? Unfortunately not. Such a solution will fail due to the lack of tangibility of cryptocurrency (which is a digital record). This, in turn, means that you eliminate the inventory category from the balance sheet categories, as well.
What can you do then? You have a couple more categories to check, including financial assets, current receivables and accruals. Both receivables and accruals shall be rejected because they do not represent the assumption behind the “investment” (a condition you cannot forget at any step of this analysis).
So let us focus on financial assets being part of long-term and short-term investments. According to the AA, financial assets include monetary assets and equity instruments issued by other entities. Thus, the definition of monetary assets is not met because, despite the fact that cryptocurrency is a virtual currency, it is not a means of payment, foreign currency or foreign exchange. Is it an equity instrument? The answer is “no”, because cryptocurrency is not a contract. Thus, cryptocurrencies would have to be classified as “other investments”...(?) 
How do IFRS answer questions about cryptocurrencies?
The International Accounting Standards Board has noticed the increasing popularity of cryptocurrencies and clarified the accounting treatment of these crypto-assets. In its position, the Board stated that, depending on the way they are used in entity’s operations, the following International Accounting Standards may apply: IAS 2 or IAS 38.
What is interesting, standards dedicated to financial instruments, including IAS 32, were rejected. Well, since crypto-assets do not meet the definition of a financial asset, this is not surprising.
What does IAS 2 say about cryptocurrencies?
This standard is devoted to inventories. If you have been reading carefully, you may rightly feel puzzled; after all, we have already rejected the inventory theory! However, we have to be aware that IAS 2 and AA are not the same.
While there is no definition of “inventories” in the AA and the Act focuses on tangible current assets, according to IAS 2 inventories include assets held for sale in the ordinary course of business. Standards here include trading in cryptocurrencies for someone else; however, in this case the measurement is different than in the case of “ordinary” inventories according to IAS 2.
When to apply IAS 38?
If you do not intend to sell cryptocurrencies, you apply IAS 38 – Intangible Assets. This is obviously because cryptocurrencies are intangible, identifiable, non-monetary assets without physical substance.
Clearly, cryptocurrencies will be disclosed in the financial statements, provided that they bring economic benefits in the future and it is possible to establish their purchase price reliably. Again, there is an apparent paradox here: according to the Polish Accounting Act, cryptocurrencies cannot be recognised as intangible assets, but according to the IFRS they can?
Yes, once again, there is a subtle difference in definition: unlike in the provisions of AA, in IAS 38 intangible assets are not narrowed down to property rights.
Simple valuation of cryptocurrencies is yet to come
This relatively new topic in financial reporting is of growing importance and in the future it may play an important role in the preparation of balance sheets and entire financial statements. When reporting cryptocurrencies, each time you need to make an analysis that will bring you closer to proper recognition and classification. But remember – the above summary of regulations helping to classify cryptocurrencies to the appropriate asset class is only a prologue to the proper valuation of crypto-assets in the books.
 As it was mentioned above, the classification to other investments would be determined only by the fact that cryptocurrencies are not recognised as property rights; such an approach is not unambiguous and one can find many articles written by lawyers who have a different opinion on this. You should keep this in mind each time when updating your accounting policy or wanting to rely on IFRS regulations.