Digital and Crypto Currencies

A digital currency is a currency which, unlike a physical currency (ie banknotes and coins) is created and stored in an electronic form. Just like traditional money, digital currencies may be used for purchasing physical goods and services but may also be limited to a specific community, such as online games and social networks.

A crypto currency is a digital currency based on a complex, encrypted mathematic algorithm. At present, there are more than 1,300 individual crypto currencies with a different practical utilisation. The most popular and commonly used crypto currency includes Bitcoin which was already established in 2009. Other widely used crypto currencies include, for example, Ethereum, Bitcoin cash and Litecoin.

The main objective of the first crypto currencies was to replace “traditional” money transfers in online shopping which were slow, expensive and non-transparent. Crypto currencies allow one to transfer money anonymously across the globe within several tens of seconds at a relatively low cost. Unlike traditional currencies (issued by central banks), crypto currencies are decentralised and cannot be influenced (destroyed, forged, devaluated) from one centre. They function without intermediaries, whereby users communicate with each other via peer-to-peer networks. Crypto currencies are fully transparent thanks to a public database entitled blockchain which demonstrates all transactions executed in the network. The aggregate volume of a crypto currency is final and pre-determined.

At present, crypto currencies are also used as “classic” investment instruments or as a means for obtaining input investment funds. They may be purchased at online exchange offices, in specialised stock markets or via “ATMs” (such as bitcoinmats).

Digital Currency Accounting and Presentation in the Czech Republic
No specific provisions for digital currency accounting and presentation have been incorporated into Czech accounting legislation currently or International Financial Reporting Standards (IFRS).

With regard to the trading with bitcoins (a specific type of digital currency), the Czech National Bank (the “CNB”) issued an opinion on 10 February 2014 stating that bitcoins are neither money nor investment instruments (as they do not meet the definition of securities or derivatives).

Tax authorities consider bitcoin to be an intangible movable property under Section 496 of the New Civil Code (another property without a tangible substance). In this context, a debate was held in practice as to whether bitcoin should be accounted for based on the purpose for which it was acquired or for which it is used. Bitcoin used as payment means would be reported as part of current financial assets (although it is not payment means). Bitcoins acquired for investment purposes would be reported as non-current financial assets (and measured at fair value if acquired for trading) and only the bitcoins which are mined by the entity would be reported as inventory.

New Opinion of the Ministry of Finance

On 15 May 2018, the long-awaited opinion of the Ministry of Finance on digital currency accounting and presentation (hereinafter the “MoF’s opinion”) was published.

The MoF’s opinion stipulates that digital currencies:

• Are an intangible asset which is created and stored in an electronic form;
• Are not issued or regulated by the central bank or a public interest authority and do not have a legal status; and
• Are accepted by selected individuals and legal persons as assets that may be transferred, stored or traded.

The MoF’s opinion states several intents for purchasing or holding digital currencies – they are used for making payments for goods and services, investments on speculative grounds, exchanging for other currencies or are “mined” which ensures their delivery into circulation.

Regardless of different motives for the holding and use of digital currencies, the Ministry of Finance currently recommends unified accounting and presentation of digital currencies by all users as a type of inventory.

Below is our opinion on the possible accounting for bitcoins in various accounting operations in line with the MoF’s opinion.

a) An entity purchases bitcoins

Bitcoins purchased by an entity are measured at cost, just like inventories. Inventories purchased in foreign currencies are translated to and subsequently recorded in the accounting records in CZK pursuant to the entity’s accounting policy.

A question remains which exchange rate shall be used since, according to the CNB’s opinion, a digital currency is not considered payment means, i.e. the CNB’s exchange rate table does not include the BTC/CZK exchange rate. It is possible to consider the application of Section 24 (9) of Act No. 563/1991 Coll., on Accounting, stipulating that foreign currencies the exchange rate of which is not promulgated on a daily basis shall be translated by the entity using the interbank exchange rate for the respective foreign currency in relation to USD or EUR and the foreign exchange rate promulgated by the CNB for USD or EUR as of the same day.

As of the balance sheet date, the entity will analyse whether the inventory value of bitcoins corresponds to their market value. If the market value is lower, the company shall, in line with the prudence concept, reduce the value of inventory by the amount of this difference in the form of a provision.

b) The entity sells bitcoins

Bitcoins sold by an entity shall be measured upon sale in the same manner as other inventory items, i.e. either for the average warehousing cost or using the FIFO method, i.e. “first in, first out”. The selected method should be specified in the entity’s internal policy.

c) The entity receives a payment for receivables in bitcoins

If an agreement between a trader and a customer exists, the value of received bitcoins is equal to the value of purchased goods or services. Otherwise, the entity shall recognise this payment as an addition to inventory in measurement as we have specified above. The receivable will be settled by means of crediting.

d) The entity settles its payables in bitcoins

An entity which has settled its payables by means of bitcoins shall recognise this payment as a disposal of inventory in measurement as we have specified above. The payable will be settled by means of crediting.

e) The entity mines bitcoins

Bitcoins mined by an entity shall be measured in line with the MoF’s opinion at internal costs. Internally developed inventory is measured at actual value or based on the production calculation specified by the entity. Internal costs include direct costs and may also involve a proportionate part of variable and fixed indirect costs which are causally attributable to the respective performance, relating to the period of activity. With respect to the “mining of bitcoins”, direct costs may include the depreciation of hardware, software, wages of “mining” employees etc.

Conclusion
We are just at the beginning of finding a solution to the optimal accounting for digital currencies in the accounting records. The MoF’s opinion is welcomed as the first step on this journey.

The article is part of dReport – July 2018, Accounting news.