We’ve already looked in the past at one accounting issue relating to cryptocurrencies, as addressed by CPA Canada’s IFRS Discussion Group.
Here’s the background to another one:
- A blockchain is a distributed digital ledger that is used to record transactions over a network of participating computers. The ledger tracks the creation and transfer of cryptocurrencies and other crypto-assets between two parties using their online addresses. Individuals and entities (also referred to as “miners” or “validators”) solve blockchain algorithms to verify the transaction data occurring between the two parties or to increase the overall supply of cryptocurrencies in circulation. Solving blockchain algorithms may involve the use of large amounts of computing power.
- Blockchain technology operates using either a “proof-of-work” or a “proof-of-stake” system that determines how the miner or validator is selected to create a new block and how it will be rewarded for maintaining the distributed ledger. Each of these systems is described more fully below:
- Proof of work – In this system, miners in the blockchain network compete against each other to solve the cryptographic hash function to validate the transaction and create a new block in the blockchain. The miner who completes this work first is compensated with transaction fees and a predetermined number of newly created cryptocurrency (referred to as “block reward”)…
- Proof of stake – In this system, typically no new cryptocurrencies are created because they have been pre-mined and the total supply is already in circulation. As a result, validators in the blockchain network are selected to validate transactions and create a new block in the blockchain based on the proportion of cryptocurrencies held and staked against the total amount staked by all those in the network. The validator earns transaction fees for validating the block…
The group considered various revenue-related issues arising from all this. First of all, most group members were of the view that the transaction fees earned can be recognized as revenue on the basis that the work performed is in the ordinary course of business for cryptocurrency miners and validators. The group then considered whether the reward of a newly created cryptocurrency resulting from the creation and closing of each new block in the blockchain can be recognized as revenue, and if not, what the appropriate accounting would be. It didn’t reach a clear consensus on the issue. Observations made and questions raised during the discussion include:
- It’s unclear whether the activity is within the scope of IFRS 15: that standard “mainly focuses on a contract between two parties (whereas) with cryptocurrency mining, there is a network of participating computers involved.” With a block reward, “there is never a clearly identifiable customer paying the block reward even when the block is created.”
- Some entities receiving a block reward may trade the cryptocurrency on exchanges and monetize it into a fiat currency if a market exists for that particular cryptocurrency. For other cryptocurrencies, there may be no clear way of monetizing the reward (at present anyway). The latter circumstances would presumably make it more difficult to recognize the reward as revenue.
- Another way of coming at that is to ask: is the block reward a reward for an activity that the entity has performed, or something being created because of the activity? If the latter, it appears that the reward would be an asset of some kind, rather than revenue or income…
- Even if you’re inclined to regard it as an asset though, it may be difficult to identify and attribute the costs incurred to create that asset separately from the costs incurred on all previous unsuccessful attempts to create the block reward…
Summing up, several group members observed “that activities in the new world economy do not fit nicely into current accounting standards, and that judgment is needed to determine the appropriate accounting.” The group decided for now to monitor the IASB’s activities in this area; at the time of writing it appears the ball is in IFRIC’s court.
It’s not hard to understand why issuers involved in this activity would be motivated to reflect the results of their activity as revenue, and it might be odd to many that it wouldn’t be treated that way. IFRS 15 envisages that part or all of a transaction price may be in the form of non-cash consideration, even using property, plant and equipment as an example, but assumes either that its fair value can be reasonably estimated, or else that the consideration can be measured indirectly by reference to the stand-alone selling price of what’s being sold. In the kind of situation we’re addressing here though, neither of those concepts may fit very securely. Can we still assert, as we have for so many years, that “cash is king,” and that accounting must keep at least one foot in a world where that holds true, or are we approaching the birth of a supplemental accounting framework based on crypto-values which have validity even if they resist “monetization” as we’ve always thought of it? Would such a supplemental framework be anything other than an airy fantasy, eventually destined to crash…?
The opinions expressed are solely those of the author