When derivatives began to appear in the public at large, government accountants believed that the derivative instruments likely would never be transacted by state and local governments
because of the complexity and risks associated with these transactions. Much has changed, and the derivative transactions are becoming a part of routine business activities of governments. Cryptocurrencies – even though still risky and ambiguous
– will soon be recorded in governments’ accounting books and presented in their financial statements.
This column presents a suggested framework for the accounting treatment of cryptocurrency transactions for state and
Characteristics of Cryptocurrencies
Cryptocurrencies are virtual forms of currency that are not distributed by a central authority and operate outside governmental oversight. A registered computer operator verifies cryptocurrency transactions,
rather than placing reliance on conventional financial institutions to validate and assure transactions. The IRS defines virtual currency as a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of
value. In some environments, it may operate like “real” currency, but it does not have legal tender status in the United States.
The IRS says virtual currency that has an equivalent value in real currency, or that acts
as a substitute for real currency, is referred to as “convertible” virtual currency. Bitcoin is one example of a convertible virtual currency. Bitcoin can be digitally traded between users and can be purchased with, or exchanged into, U.S.
dollars, Euros, or other real or virtual currencies. The sale or exchange of virtual currencies, the use of virtual currencies to pay for goods or services, or holding virtual currencies as an investment do have tax consequences that could result in tax
Accounting of Cryptocurrencies
The Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB) have not yet issued guidelines or statements regarding the accounting treatment of cryptocurrencies. But to
give some idea of where the issue may be headed, we can look to the International Accounting Standards Board (IASB). Its interpretation committee has had tentative discussions to weigh which of the International Financial Reporting Standards (IFRS) would
be applicable for the accounting of cryptocurrencies.
IASB’s interpretation committee, noting that a range of crypto assets exist, considered the subset of cryptocurrencies with the following characteristics:
- Digital or virtual currencies recorded on a distributed ledger and using cryptography for security.
- A cryptocurrency not issued by a jurisdictional authority or other party.
- The holding of such cryptocurrency does not give rise to a contract between the holder and another party.
The committee concluded that International Accounting Standard (IAS) No. 2, Inventories
, applies to cryptocurrencies when held for sale in the ordinary course of business. If IAS No. 2 is not applicable, an entity would apply IAS No. 38, Intangible Assets
to their holdings of cryptocurrencies.
IAS No. 2 applies to inventories of intangible assets. The standard defines inventories as assets held for sale in the ordinary course of business, in the process of production for such sale,
or in the form of materials or supplies to be consumed in the production process or in the rendering of services. IAS No. 38 applies in accounting for all intangible assets, except for those that are within the scope of another standard; financial assets
as defined in IAS No. 32, Financial Instruments: Presentation
; the recognition and measurement of exploration and evaluation assets; and expenditures on the development and extraction of minerals, oil, natural gas, and similar nonregenerative
Accordingly, IASB’s committee considered whether the holding of cryptocurrency meets the definition of a financial asset in IAS No. 32. IAS No. 32 defines a financial asset as any asset that is cash, an equity instrument of another entity,
a contractual right to receive cash or another financial asset from another entity, a contractual right to exchange financial assets or financial liabilities with another entity under particular conditions, or a particular contract that will or may be
settled in the entity’s own equity instruments.
The interpretation committee concluded that a holding of cryptocurrency is not a financial asset. This is because a cryptocurrency is not cash. Some cryptocurrencies can be used in
exchange for particular goods or services, but the committee noted that it was not aware of any cryptocurrency used as a medium of exchange and as a monetary unit in pricing goods or services to such an extent that it would be the basis on which all transactions
are measured and recognized in financial statements. Consequently, the IASB committee concluded that a holding of cryptocurrency is not cash because cryptocurrencies do not currently have the characteristics of cash. Additionally, cryptocurrencies are
not an equity instrument of another entity. It does not give rise to a contractual right for the holder, and it is not a contract that will or may be settled in the holder’s own equity instruments.
The use of cryptocurrencies has increased to a degree that the IRS requires the reporting of any measurable gain or loss resulting from cryptocurrency transactions in the tax returns of individuals or businesses. State and local governments
will soon find themselves having a significant number of cryptocurrency transactions. Therefore, government accountants are looking to GASB to include on its research agenda the accounting and reporting issues related to these virtual assets.
The suggested accounting framework and outline presented by the IASB’s initial discussion is a starting point to account for cryptocurrency transactions that can be modified to fit with the principles and concepts of governmental accounting.
Government accountants may find common agreement with an IASB conclusion that cryptocurrencies are not financial assets because they are not cash nor equity instrument of another entity. If cryptocurrencies meet GASB’s definition of inventory,
state and local governments can account for cryptocurrencies as inventory. GASB Statement No. 62, Codification of Accounting and Financial Reporting Guidance Contained in Pre-November 30, 1989
, FASB and AICPA Pronouncements
inventory as tangible personal property that is held for sale in the ordinary course of operations, in process of production for such sale, or to be currently consumed in the production of goods or services to be available for sale. A government may possibly
apply the lower of cost or market rule if the market value of the inventory of cryptocurrencies is less than its cost on the date of the financial statements. Additionally, the fund balance associated with the inventory of cryptocurrencies should be considered
nonspendable fund balance on the governmental funds balance sheet.
If cryptocurrencies do not meet the definition of inventory, a government perhaps could account for them as intangible assets. GASB Statement No. 51, Accounting and Financial Reporting for Intangible Assets
defines intangible asset as an asset that possesses all the following characteristics: lack of physical substance, nonfinancial in nature, and an initial useful life extending beyond a single reporting period.
The intangible asset of
cryptocurrencies should be presented as capital assets in a government’s statement of net position. Accordingly, existing GASB accounting standards related to the accounting and financial reporting for capital assets, including the standards for
recognition, measurement, impairment, presentation, and disclosures should be applied to the intangible asset of cryptocurrencies.
Khaled Abdel Ghany, CPA, PhD, is an executive accounting adviser with DC Government in Washington, D.C. He can be reached at firstname.lastname@example.org.