Digital Assets: IFRS vs. GAAP – Net Realizable Value, Cost Basis, or Fair Market Value

Understanding how digital assets are reflected on a company’s financial statements can certainly vary based upon a few different criteria, such as; the type of digital assets that the company holds, business model, and if the business complies with either GAAP or IFRS standards. Even though GAAP standards mention that digital assets should be reflected on a company’s balance sheet at the Fair Market Value, in accordance to “Subtopic 350-60 digital assets are measured at fair value under Topic 820 after their acquisition, with fair value changes recorded in current period earnings (Muir 2024).” A company that follow’s IFRS standards may reflect digital assets at cost or net-realizable value, whichever is lower. Moreover, companies that comply with IFRS standards, digital assets can be subject to impairment, along with revaluation back up to the original cost-basis. However, we'll see that IFRS does allow for Fair Value accounting as well, for certain circumstance. The primary differences between GAAP and IFRS standards can be found in KPMG’s recent article listed in the sources below.?As mentioned, under IFRS Accounting Standards:?

• "Digital assets classified as intangible assets are typically indefinitely lived and measured after their acquisition at cost less impairment losses. ?

• When digital assets are classified as inventory, but the company is not a broker-trader, they are measured at the lower of cost and net realizable value (NRV).” ?(Muir 2024)?

Now, why is this the case and what is net realizable value? “The term net realizable value (NRV) refers to the net amount that a company expects to realize from the sale of inventory. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion and disposal (Warfield 2022).” Due to market conditions, it is possible that the fair market value of the digital assets within a company’s inventory could fall below the acquisition price or cost basis associated with the original purchase. Therefore, “a departure from cost is justified because inventories should not be reported at amounts higher than the amount that is expected to be realized from sale or use. (Warfield 2022).” Hence the justification associated behind the IFRS policy. However, according to IFRS standard, there are a couple of paths for companies to also reflect their digital asset holdings at fair value, somewhat comparable to GAAP standards. ??

According to KPMG, “IFRS Accounting Standards offer two possible routes to fair value subsequent measurement of digital assets classified as intangible assets or inventory:?

• The revaluation model in IAS 384?can be applied as an accounting policy option to intangible assets if an active market exists; however, determining whether an active market exists can be challenging.?

• Broker-traders measure their inventory at fair value less cost to sell under IAS 25.”?(Muir 2024)?

Nonetheless, depending on the circumstances associated with how digital assets are treated, such as; inventory or intangible assets, along with jurisdictional requirements, and business model, there is consistency associated with keeping track of cost-basis, along with understanding market conditions, and possibly making adjusting entries accordingly. ?

Sources:??

Muir, S., Tricarichi, N., & Ahuja, K. (2024, September 6). Digital assets under IFRS Accounting Standards vs US GAAP: The basics. IFRS Institute. KPMG. Retrieved from https://kpmg.com/us/en/articles/2024/digital-assets-under-ifrs-accounting-standards.html ?

Warfield, Donald E. Kieso, Jerry J. Weygandt, Terry D. Intermediate Accounting. Available from: MBS Direct, (18th Edition). Wiley Global Education US, 2022.?