Accounting for Stablecoins Under IFRS

Stablecoins are a type of cryptocurrency designed to minimize price volatility by pegging their value to a stable asset or basket of assets. Common examples include Tether (USDT), USD Coin (USDC), and DAI. As the use of stablecoins increases for transactions, investments, and as a store of value, understanding their accounting treatment under International Financial Reporting Standards (IFRS) becomes crucial.

This article intends to encapsulate the accounting for stablecoins from the holder’s perspective.

Classification and Initial Recognition

1. Financial Instruments

Stablecoins may be considered financial instruments under IFRS 9 if they meet the definition of a financial asset. According to IFRS 9, a financial asset is any asset that is:

·?????? Cash.

·?????? An equity instrument of another entity.

·?????? A contractual right to receive cash or another financial asset from another entity.

Given that stablecoins are designed to be redeemable on demand for a fixed amount of fiat currency, they could be classified as financial assets. However, it is important to analyse the terms and conditions of each stablecoin to determine if the entity has contractual redemption rights. If the entity doesn’t have redemption rights then it is unlikely to meet the definition of financial instrument under IFRS 9.??

If stable coin meets the definition of financial instrument under IFRS 9, then following accounting rules apply

·?????? Initial Measurement: Financial assets are initially measured at fair value plus or minus, in the case of a financial asset not at fair value through profit or loss, transaction costs directly attributable to the acquisition.

·?????? Subsequent measurement: Depending on the business model and contractual cash flow characteristics, stablecoins can be measured:

o?? At amortized cost: Financial assets held to collect contractual cash flows representing solely payments of principal and interest are measured at amortized cost. The effective interest method is used, recognizing interest revenue over the period to maturity.

o?? At fair value through other comprehensive income (FVOCI): Financial assets held to collect contractual cash flows and for sale are measured at FVOCI. Changes in fair value are recognized in other comprehensive income until derecognition, except for impairment losses and reversals, interest revenue, and foreign exchange gains and losses.

o?? At fair value through profit or loss (FVTPL): Financial assets not classified at amortized cost or FVOCI are measured at FVTPL. Changes in fair value are recognized in profit or loss.

·?????? Fair Value Measurement: Fair value can be determined using quoted prices in an active market. If an active market is not available, other valuation techniques such as discounted cash flow analysis may be used.

In our experience, the application of the ‘business model test’ for stablecoins requires exercise of judgment since the manner in which these assets are used may sometimes be unconventional and therefore necessitating a closer analysis of the underlying conditions.

Additionally, the determination of ‘fair value’ may involve subjectivity in looking at the various available sources of information regarding the value of these assets at each reporting date.

2. Inventory

If an entity holds stablecoins for sale in the ordinary course of business, they might be classified as inventory under IAS 2.

·?????? Initial Measurement: Inventory is initially measured at cost, which comprises all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition.

·?????? Subsequent Measurement: Subsequent to initial recognition, inventory should be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale.

It is important to note that, in our experience, classification as ‘inventory’ may be constrained to limited instances and requires careful deliberation. The conclusion is generally predicated on the underlying business model in which the stablecoins are held, used and/or monetized.

Additionally, entities which are actively involved in trading/exchange of stablecoins need to determine whether the ‘broker-trader’ exception under IAS 2 is applicable in their context.

3. Intangible Assets

If stablecoins do not meet the definition of a financial asset and are not held for sale in the ordinary course of business, they might be classified as intangible assets under IAS 38. According to IAS 38, an intangible asset is an identifiable non-monetary asset without physical substance.

·?????? Initial Measurement: Intangible assets are initially measured at cost. Cost comprises the purchase price and any directly attributable costs of preparing the asset for its intended use.

·?????? Subsequent measurement: Entities have the option to measure intangible assets:

o?? At cost less any accumulated amortization and any accumulated impairment losses (cost model).

o?? At a revalued amount, being fair value at the date of the revaluation less any subsequent accumulated amortization and subsequent accumulated impairment losses (revaluation model).

·?????? Amortization and Impairment: Intangible assets with finite useful lives are amortized over their useful lives. Intangible assets with indefinite useful lives are not amortized but are tested for impairment annually or whenever there is an indication of impairment.

For entities that opt for the ‘revaluation model’, determination of the fair value as on each revaluation date would involve subjectivity and considering available information with regards to the ‘transactable’ value as well as liquidity constraints etc.

Another key area of judgement is the determination of useful life. Given the nature of these assets, identifying the period over which economic benefits can be generated involves significant judgement.

Overall considerations

Accounting for stablecoins under IFRS involves careful consideration of their classification and measurement.

Entities must assess whether stablecoins are financial instruments, inventory or intangible assets (in the context of their business and the nature of their digital assets operations/strategies) and apply the relevant standards accordingly.

With the growing use of stablecoins, developing a comprehensive understanding of their accounting treatment is essential for accurate financial reporting and compliance with IFRS.