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Crypto as an asset class for Corporate Treasury

Publications Crypto

The recent crypto frenzy driven by soaring prices seems to have reached its apex in the recent days, following Elon Musk’s twitter announcement about its Tesla USD1.5B investment in digital assets (namely Bitcoins – BTC).

Although Mr. Musk’s move could be considered a gamble by many, an increasing number of companies have some level of exposure to crypto, either through investments, partnerships, or side ventures.
Below a list recently issued by yahoo! Finance, at the time of writing the information about Tesla has not been update yet.

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So why are cash rich companies buying crypto?

The answer is rather simple, they are changing capital allocation strategy for maximizing value for its stakeholders. As Microstrategy CEO Michael Saylor recently stated, Bitcoin is “not only a reasonable hedge again inflation but also the prospect of earning a higher return than other investments”.

What are the accounting implications for companies using BTC for treasury management purposes – US vs HK IFRS Foundation, the non-profit organization that sets international accounting standards, has issued an agenda decision in June 2019, outflinging the proposed accounting treatment of “Holding of Crypto Currencies”. Rather than creating a specific accounting treatment, in the agenda decision, the IFRS Interpretation Committee concludes that Cryptos meet the definition of an intangible assets as defined in IAS38 - Intangible Assets.
In Hong Kong, HKICPA supports the tentative agenda of IFRS, nevertheless acknowledges that IAS38 was developed long before cryptocurrencies and was not designed with transactions that involve cryptocurrencies in mind. Applying IAS 38 may not always provide the most useful to users of financial statements.

Why Hong Kong accounting standards have an edge on USGAAP when it comes to crypto

As HKICPA states, HKFRS/IFRS Standards do not explicitly discuss crypto-asset transactions. Therefore, companies may need to apply judgment as to how to account for such transactions.

The IFRS Committee defines crypto currencies as:

  • A digital or virtual currency recorded on a distributed ledger that uses cryptography for security.
  •  As not issued by a jurisdictional authority or other party.
  • It does not give rise to a contract between the holder and another party.

In layman terms, crypto is not classified as cash or equivalent by the Committee, it is rather considered as an Intangible Asset (an identifiable non-monetary asset without physical substance).

While in general, it is possible to agree with IFRS classification, we find it nowadays difficult to consider all cryptos as intangible assets. Stable coins such as USDT or USDC may be identifiable as monetary assets (as they give the holder a right to receive a fixed or determinable number of units of currency), being pegged by definition to the US dollar.

The accounting treatment – US vs. HK – the advantage

Domestic public entities in US are required to apply U.S. Generally Accepted Accounting Principles (US GAAP). As for private companies, whose capital market activities fall outside the perimeter of US SEC’s requirement, there is no centralized determinant of the financial reporting framework to be used. Having said that, in practice, most domestic companies would apply US GAAP in meeting the requirements or standards of the local authorities or business partners

Although cryptos should be classified as intangible assets under both US GAAP and IFRS, there are differences to the accounting treatment.

Under IFRS, intangible assets may be revalued to fair value (under the condition that there is an active market) while under US GAAP, revaluation is not allowed but intangible assets should be tested for impairment.

Below we have drafted an example of the different accounting treatment in the case of a company purchasing digital assets in 2020, assuming a decrease in the fair value during 2021 and in increase in 2022. US company will be forced to apply impairment charges to their books, having a negative effect on their earnings. Below a graphical example:
graph crypto

Tabella Crypto2

Under both IFRS and US GAAP, companies would record the impairment loss in the P&L if the fair value of the cryptos is below carrying value. The difference appears when the value goes back up, companies would record fair value gain under P&L or other comprehensive income under IFRS while companies may not make any upward revisions until the cryptos are disposed.

On the other hand, Hong Kong companies apply the Re-evaluation model. Decrease in value of Crypto will have a negative impact on the P&L, while an increase will be reflected in the P&L under «other comprehensive income/ Chang of fair value of intangible assets».
An example of Hong Kong accounting treatment of crypto is provided by the company Global Token Limited, whose financial statements are available to the public.
In the notes of the consolidate financial statements, the company mentions that crypto currencies are carried at cos less impairment, reflecting the fact that the Group’s cypto currencies are assets which are resources controlled by the Group and from which future economic benefits from selling the crypto currencies in the OTC markers are expected to flow to the Group.

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