The first attempts to introduce electronic money took place in the 20th century in connection with the gradual expansion of the Internet. The purpose was to create a unique electronic payment instrument that could make fast payments in real-time regardless of the state borders or the geographical location of the parties. This particular article focuses on cryptocurrency accounting.
Bitcoin – the first cryptocurrency
The emergence of Bitcoin, the first cryptocurrency, had a similar motivation. Regular money transfers were slow, expensive, opaque, and non-anonymous. None of this applies to Bitcoin. Bitcoin is a digital asset based on cryptography designed to serve as a medium of exchange. Bitcoin is based on blockchain technology, which means that every transaction and every coin exists in an unmodifiable ledger. The maximum total number of Bitcoins is finite, and mining costs are gradually increase as the number of possible combinations decreases.
In 2011, this currency started obtaining notoriety from economic experts and two years later, by the lay public. It was at a time when the euro was going through major crises and people were looking for an alternative. The price of Bitcoin started to rise significantly. 2013 became the year of Bitcoin, and at the same time, it proved to be an opportunity to invest and capitalize. Bitcoin can be bought in the same way as any other currency or can be speculated on just like with any other currency on Forex.
International Accounting Regulations
As exciting as the phenomenon of cryptocurrencies is, cryptocurrency accounting issues have arisen in terms of their reporting and measurement in financial statements. The accounting regulations (International Accounting Regulations and Czech Accounting Standards) do not address cryptocurrency accounting at all.
IFRS Cryptocurrency Accounting
There is no cryptocurrency regulation in the IFRS (International Financial Reporting Standards). However, there is a rule in the IFRS that states that, for assets not contemplated, the entities should apply the general accounting methods. An essential prerequisite for adherence to the requirements of international standards is the reporting of cryptocurrencies according to their acquisition and use purposes. After clarifying the intention of acquisition, there are different possible reporting methods for cryptocurrencies according to the IFRS. They may be presented as a means of payment, a short-term or long-term non-financial investment, or as securities backed by goods or assets.
Czech Cryptocurrency Accounting
There is also no mention of cryptocurrencies in Czech accounting. However, there is a recommendation of the Ministry of Finance from May 15, 2018 that, despite different possible motives for holding and using digital currencies, recommends uniform accounting and reporting of digital currencies across all users. This recommendation consists of accounting and reporting of digital currencies as “in kind”. It also recommends to report them on a separate line under “C.I.2. Work in progress’, C.I.3.1. Products “or” C.I.3.2. Goods”. At the same time, Section 4 (1) of this Decree can include the report of digital currencies separately from other inventory items by adding a separate item. The notes of the financial statements shall state the purpose of acquiring and holding digital currencies. They should also mention the method of their valuation, including any provision for impairment.
The National Accounting Council also assessed this situation and they backed the recommendation of the Ministry of Finance. The National Accounting Council is preparing an interpretation on this issue. The understanding is that it should not change the communication of the Ministry of Finance of the Czech Republic; it only extends and complements it. It should assist entities that use cryptocurrencies to a significant extent for which their reporting in inventories is inadequate. The solution should be IFRS compatible to ensure comparability and reduce the need for conversions. The interpretation has not yet been submitted for external comment procedures.
The last topic we did not deal with is the taxation of cryptocurrencies. This topic has already been dealt with in previous issues.