More issues arising from digital currencies (on the assumption that anyone still has sufficient belief in them to be paying attention…)
We’ve discussed matters relating to digital currencies a couple of times in the past (see here for instance). Here’s the fact pattern for another one, as recently discussed by CPA Canada’s IFRS Discussion Group:
- Entity X holds Bitcoins, which have been accounted for using the cost model under IAS 38 Intangible Assets.
- Entity X entered into an agreement to purchase services from a third party over a one-year period and has agreed to pay that party 12 Bitcoins (i.e., one Bitcoin per month) in exchange for the services.
The group considered how Entity X should account for this arrangement. One possibility is to measure the services at the fair value of the bitcoins exchanged. IAS 38.45, addressing exchanges of non-monetary assets, envisages measurement at fair value unless “(a) the exchange transaction lacks commercial substance or (b) the fair value of neither the asset received nor the asset given up is reliably measurable.” By analogy, that premise might seem to fit here. Alternatively, you might not consider the analogy applicable, and conclude the services should be measured instead at the carrying value of the bitcoins exchanged. Or maybe the entity has a policy choice.
The group supported the view that the services should be measured at the fair value of the bitcoins. This is particularly clear if you take the view that bitcoins are intangible assets (as we addressed before, this may seem like the best analysis, not that it doesn’t come with problems). IAS 38.116 directs that the amount of consideration included in gain or loss on derecognizing an intangible asset is measured in accordance with IFRS 15, that is at fair value. The meeting report makes some additional observations:
- Some Group members also noted that the mode of payment should not change the cost of the service. This means that whether the services were paid with Bitcoins, U.S. Dollars or gold, the services should be at fair value. There was some discussion as to whether the fair value should be the Bitcoin itself, or the fair value of the services rendered. The Group noted that judgment would be applied to determine which fair value would provide the better measure.
This seems to chime against a frequent issue in applying IFRS 2, that whereas companies often seem to default to measuring equity-settled share-based payment transactions at the fair value of the instruments issued, that’s only appropriate when the fair value of the goods or services can’t be estimated reliably. In an economically rational negotiation, where one definable service is being exchanged for a particular quantity of equity instruments, you’d imagine the two measures should usually be more or less the same. But as we know, such negotiations are often pretty vague and speculative, along the lines of (say), sure, I’ll kick in some time helping you with this and that, and then you give me so many stock options, and we’ll see how it works out. Seemingly by definition, someone willing to commit to providing a year of services and to being paid in bitcoins isn’t applying the most rigorous price list in how they value their time.
The group then moved on to this:
- Entity Y entered into an agreement with one of its employees under which the employee will receive Bitcoins in exchange for providing services for three years.
- The number of Bitcoins that the employee will receive was determined up-front (i.e., nine Bitcoins) and the employee will receive the Bitcoins over the three-year term of the agreement (i.e., three Bitcoins per year). If the employee leaves Entity Y during the three-year term, he or she will be entitled to a pro rata share of the Bitcoins earned to the date of termination or departure.
The group agreed that this arrangement falls within the scope of IAS 19. IAS 19.2 states it applies “by an employer in accounting for all employee benefits, except those to which IFRS 2 Share-based Payment applies.” IAS 19.8 states that “[e]mployee benefits are all forms of consideration given by an entity in exchange for service rendered by employees or for the termination of employment.” That’s the easy part though. Among other things, an entity would then need to consider whether the arrangement meets the definition of a defined benefit plan or a defined contribution plan? If the former, it opens up the whole complex mechanism of actuarial assumptions and adjustments (it’s not just an oversight that I’ve seldom addressed that standard on this blog…)
For many of us, it might be hard to get past the notion of an individual who signed up for such an arrangement when bitcoin was at its peak, subsequently finding herself toiling away in return for peanuts as their value erodes away. Hopefully this imaginary person didn’t also sign away her right to quit…
The opinions expressed are solely those of the author