CRYPTO: Valuation of crypto (in the context of IFRS 13)

Globalization: Issue on foreign currency exchange rates…or is it?

Translating foreign-currency denominated crypto-assets is no different from translating any non-monetary asset like intangible assets, inventories or property, plant and equipment.

Paragraph 16 of (I)PAS 21, The Effects of Changes in Foreign Exchange Rates, states that the essential feature of a non-monetary item is the absence of a right to receive (or an obligation to deliver) a fixed or determinable number of units of currency.

At the end of each reporting period, non-monetary items that are measured at fair value in a foreign currency shall be translated using the exchange rates at the date when the fair value was determined (par. 23, ibid).

When a gain or loss on a non-monetary item is recognised in other comprehensive income, any exchange component of that gain or loss shall be recognised in other comprehensive income (OCI), i.e., crypto-assets accounted for as intangible assets under the revaluation model where the revaluation surplus is being recorded in OCI. Conversely, when a gain or loss on a non-monetary item is recognised in profit or loss, any exchange component of that gain or loss shall be recognised in profit or loss, i.e., crypto-assets held by a broker-trader carried at fair value less cost to sell where changes are credited or charged against profit or loss. (par. 30, ibid).

FOOTNOTES: Disclosing the fairness in the valuation

As in all things, fairness is justice already served. When disclosing supplementary information in the financial statements for crypto – particularly on its valuation – what does a preparer of an IFRS accounts has to keep in mind to satisfy the fairness hunger of the users?

If an entity measures crypto-assets at fair value, paragraphs 91–99 of (I)PFRS 13, Fair Value Measurement, specify the applicable disclosure requirements.

In PwC’s In depth: A look at current financial reporting issues, it states there that given that markets for cryptographic assets are rapidly evolving, determining the fair value of cryptographic assets can be complex. (I)PFRS 13 notes that, in making disclosures about fair value, the following factors should be considered:

– the level of detail necessary to satisfy the disclosure requirements;

– how much emphasis to place on each of the various requirements;

– how much aggregation or disaggregation to undertake; and

– whether users of financial statements need additional information to evaluate the quantitative information disclosed.

At the minimum, the fair value disclosure requirements are:

  • Fair value of crypto-assets held, especially that are not measured at fair value;
  • Level of the fair value hierarchy within which the fair value measurements are categorized; and
  • Description of the valuation techniques and inputs used to determine fair value.

(I)PFRS 7, Financial Instruments: Disclosures, although not necessarily applicable – could be a useful guidance in disclosing the following:

  • Nature and extent of risks arising from the holding of crypto-assets; and
  • Risk management process, strategies and actions.

Since this is an evolving area of accounting, entities should closely monitor the developments for them to align their disclosures with market expectations and requirements (ibid).

NEXT STEPS

Dealing with crypto valuation requires not only a detailed understanding of both the blockchain and relevant accounting concepts but most importantly a clear articulation of the investment thesis and on for which is centered on evaluation of qualitative and fundamental criteria. Pragmatism over the purpose and the required level of reliance to be placed on the valuation are also some of the key considerations.

Yet again, the world is still on a wait-and-see but we can always start preparing. The relevant question is, how are you positioning yourself?

Next articles: TAXATION ON CRYPTOAUDITING CRYPTO

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