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Accounting Treatment for Cryptocurrency

Author Melissa YeoMelissa Yeo

5 min read
Money Talk

Cryptocurrency is an innovative trend that is here to stay. However, digital assets can be volatile and affected by prominent individuals – that’s why it is crucial to get your cryptocurrency accounting treatment right. Read on as we delve into the appropriate cryptocurrency accounting treatment.

Accounting Treatment for Cryptocurrency

Cryptocurrency has gained popularity in recent years, with its usage dramatically increasing. With the rise in cryptocurrency buyers, companies and merchants are also increasingly offering cryptocurrency as a mode of payment.

Some companies tout cryptocurrency as the future of finance. For instance, companies including Square, MicroStrategy, and Tesla have been adding cryptocurrencies such as Bitcoin to their balance sheets.

In this digital age, it seems like cryptocurrency is here to stay. However, cryptocurrency accounting is tricky since it does not fall within financial reporting frameworks in Singapore. Fret not – read on for our guide on how you can determine the correct accounting treatment for your cryptocurrency transactions.

Need immediate help? Simply reach out to our experienced accountants in Singapore.

What Is Cryptocurrency?

Think of cryptocurrency as intangible monies in the form of coins or digital tokens based on blockchain technology. Additionally, most cryptocurrencies are not set by a central authority. This means that cryptocurrency should theoretically be immune from government interference.

While cryptocurrencies are not considered legal tender at the moment, cryptocurrency exchanges and trading are legal in the city-state.

In 2017, the Monetary Authority of Singapore (MAS) adopted a neutral stance on cryptocurrency, clarifying that it would not attempt to regulate virtual currencies, but will regular digital payment tokens (DPT) if they were categorised as "securities".

Since DPT is not legal tender in Singapore, the tax authority regards Bitcoins as "goods". This means that the Goods and Services Tax (GST) will be imposed.

Is Cryptocurrency Considered Cash in Singapore?

According to Singapore’s Financial Reporting Standard (FRS 7), cash is defined as  “short term, highly liquid investments that are readily convertible to known amounts of cash and that are subject to an insignificant risk of changes in value.”

Therefore, cryptocurrency is not considered cash since they:

  1. Are volatile and do not meet the requirement of having “insignificant risk of changes in value”
  2. Are listed on stock exchange
  3. Are not legal tender backed by the government

Which Accounting Standards Can Be Used for Cryptocurrency?

Since there is no GAAP (Generally Accepted Accounting Principles) to adhere to for cryptocurrency accounting, the person preparing financial statements will have to carefully consider which Financial Reporting Standards (FRS) to adopt for proper accounting of cryptocurrencies.

The following considerations can determine the way you account for your cryptocurrency:

  1. Consideration as intangible assets (FRS 38)
  2. Consideration as inventory (FRS 2)
  3. Consideration as financial instruments (FRS109)
FRS Categorisation Subsequent associated measurement basis
Intangible assets (FRS 38) Revaluation model Fair value at revaluation date minus any following amassed amortisation and any following amassed impairment losses
Cost model Cost minus any amassed amortisation and any amassed impairment losses
Inventory (FRS 2) Inventory held by entity functioning as broker-trader Fair value minus costs to sell
Inventory Lower of cost and net realisable value
Financial instruments (FRS109) Financial asset recorded at fair value through profit or loss Fair value through profit or loss
Financial asset recorded at fair value through other comprehensive income Fair value through other comprehensive income
Financial asset recorded at amortised cost Amortised cost
  1. Consideration as intangible assets (FRS 38)

According to FRS 38, an intangible asset is “an identifiable non-monetary asset without physical substance”.

This type of asset is identifiable if it is either:

a) separable, e.g. capable of being divided or separated from the organisation and sold, licensed, transferred, exchanged, or rented, either on its own or together with an associated contract, identifiable liability or asset, regardless of whether the organisation intends to do so

(b) arising from contractual or other legal rights, irrespective of whether those rights are separable or transferable from the organisation or other obligations and rights

Since cryptocurrency can be sold through a cryptocurrency exchange, it is identifiable since it can be separated from the organisation. Additionally, FRS 21 mentions that a key feature of a non-monetary asset “is the absence of a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency”.

Therefore, cryptocurrency fulfils the definition of an intangible asset and can be accounted for under this classification.

  1. Consideration as inventory (FRS 2)

According to FRS 2, inventories are assets that are:

  • held for sale in the usual course of business
  • amid production for such sale or
  • in the form of supplies or materials to be utilised in the production process or the rendering of services

Depending on your business model, you could account for your cryptocurrency transactions as inventories if you hold cryptocurrency for sale in the usual course of your business. This should be reported at a lower cost and net realisation value. Nonetheless, if your company is acting as a cryptocurrency trader or broker, then it should be reported at a fair value less costs to sell.

  1. Consideration as financial instruments (FRS109)

According to FRS 109, it appears as though cryptocurrency could be considered a financial asset at fair value through profit or loss (FVTPL).

However, cryptocurrency does not seem to meet a financial instrument’s definition since it does not represent an equity interest in an entity, cash, or a contract establishing an obligation or right to receive or deliver cash or another financial instrument. Furthermore, cryptocurrency is neither debt security nor equity security, since it does not represent an ownership interest in an entity. As such, you should not account for your cryptocurrency as a financial asset.

Other Cryptocurrency Considerations

Cryptocurrency accounting is challenging since there is no standard framework to adhere to. As such, here are some other considerations for your cryptocurrency accounting:

  • Disclosure: If your company is holding cryptocurrency assets, you will have to comply with either International Accounting Standards (IAS) 2 or IAS 38’s disclosure requirements. Since cryptocurrency accounting does not easily fit within the International Financial Reporting Standards (IFRS) framework, you may wish to consider additional disclosures in compliance with the IAS 1 Presentation of Financial Statements’ overall objective.
  • Mining: Mining is the process of verifying various cryptocurrency forms and adding them to the blockchain digital ledger. Some issues may arise for organisations mining cryptocurrency. These miners utilise high computing power to solve blockchain algorithms. When this block has been solved, there might be transaction fees involved for the verification of cryptocurrency transactions and adding them to the blockchain ledger.
  • Currency translation: Cryptocurrency has to be translated to your organisation’s functional currency according to IAS 21, under ‘The Effects of Changes in Foreign Exchange Rates’. In terms of accounting, a cryptocurrency holding will be staked using the spot exchange rate between the functional currency and the cryptocurrency at the date of acquisition.

Bid Farewell to Paperwork Woes With Stress-Free Cryptocurrency Accounting

Cryptocurrency is an emerging trend for people and entities to invest in their digital portfolios. Nevertheless, digital assets can be highly volatile and affected by prominent individuals – that is why it is crucial to get your cryptocurrency accounting treatment right.

Needless to say, accounting and tax repercussions for your cryptocurrency transactions take a lot of work. Don’t worry, for we’ve got your back.

At Osome, we understand that your business is unique. Our experienced accountants will work closely with you to comprehend your needs and help you achieve your objectives with practical solutions.

We free you from cryptocurrency accounting – you grow your business, we'll do the rest. Contact Osome to find out more.

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