CO accounting for cryptocurrencies

Authors: Markus Vogel (Co-Chair Working Group Tax / Accounting / Structuring and Partner Tax KPMG AG), Heiko Petry (Board Member Working Group Tax / Accounting / Structuring and Audit Senior KPMG AG)

The accounting for cryptocurrencies is not specified in the Swiss Code of Obligations (CO). Hence, an interpretation of the existing rules and the recognised financial reporting principles of Art. 958c is required. The following analysis focuses on payment token and uses Bitcoin as an example.

Balance sheet eligibility
Art. 959 (2) specifies the capitalization criteria for assets. Items must be entered on the balance sheet if the entity can dispose of these items as a result of past events, if cash inflow is probable and if their value can be measured reliably. Since Bitcoin and other cryptocurrencies alike are either bought, received in exchange or mined, can be sold or exchanged for goods and services, can be controlled via private key and have an observable market price, the capitalisation criteria can be considered fulfilled.

Dependent on the intended use, Bitcoin and other cryptocurrencies alike can be accounted for in the following financial statement captions (FSC).

Current assets with a stock exchange price resp. (non-current) financial assets
In Swiss accounting practice the term securities (‘Wertschriften’) is not limited to commercial papers, but also embraces promissory notes and even precious metals and tradable raw material.[1] These items have in common that an observable market price is available resp. that their fair value can measured reliably. The existence of a counterparty is not necessarily needed. Thus, Bitcoin (for which an active market exists) can be accounted for under securities in the current respective non-current assets depending on the intended investment horizon.

Inventories
This FSC comprises inter alia raw materials, supplies, service products, finished products and commodities that are usually consumed or sold in the normal operating cycle of an entity. Depending on the ordinary course of business of an entity (e.g. regular trading, mining or using the Bitcoin mainchain to anchor sidechains), it can be appropriate to account for Bitcoin as inventories.

Intangible assets
Bitcoin units are identifiable and without physical substance. Even though they partly fulfil the attributes of money (medium of exchange, store of value and unit of account), they are not comparable to the Swiss franc or foreign currencies, due to their missing legal tender status[2] and central bank support. They show a lack of broad acceptance, high volatility, (currently) low transaction speed and high (domestic) transaction costs. Consequently, Bitcoin is discernible to (fiat) money and fulfils the characteristic of non-monetariness required for intangible assets. Hence, Bitcoin can be accounted for as an intangible asset, although the FSC (non-current) financial assets certainly better meets the properties of Bitcoin held as a long-term investment.

The following FSC are not appropriate to account for Bitcoin:

Cash and cash equivalents
See explanation pertaining intangible assets.

Trade and other receivables or prepaid expenses
For Bitcoin and other cryptocurrencies alike no issuer or counterparty exists which was obliged to accept it as a means of payment or to exchange it for fiat money. The owner of Bitcoin units cannot enforce any claims against other users or the network. Balances that are stored at a wallet provider, who has sole or joint control over the private keys, are generally just held in fiduciary custody by the service. Neither can the service freely dispose thereof nor does it bear the risk and rewards of price fluctuation. Moreover, with the means of an internal ledger, the respective balances of each customer can be allocated even if the service used a pooling address.

Valuation
Under CO, assets are initially measured at their acquisition or manufacturing costs according to Art. 960a. This value generally represents the upper valuation threshold, which may be adjusted for amortisation, depreciation and, if necessary, impairment.

Art. 960b allows a subsequent measurement at the price as of the balance sheet date for certain assets with a stock exchange price or otherwise observable market price in an active market. This also applies to Bitcoin and other cryptocurrencies, independent of in which FSC they are accounted for (while considering Art. 960b (1) second sentence). The Swiss Federal Tax Authorities publish year-end prices for certain cryptocurrencies that can be used, but it would also be appropriate to apply the price of a specific market place where the entity usually trades its units.

For assets measured in accordance with Art. 960b, a valuation adjustment can be made in order to compensate for future price fluctuations. The valuation adjustment is considered a business-related allowance and thus basically fiscally accepted.[3] The profit-effective valuation adjustment may not exceed the difference between the price at balance sheet date and the acquisition or manufacturing costs.

 

 

References:

[1] Gutsche (2014) Art. 959a Rz. 46-49. Rechnungslegung nach Obligationenrecht. veb.ch Praxiskommentar mit Berücksichtigung steuerrechtlicher Vorschriften. Verlag SKV: Zürich.
[2] The status as a legal (= non-illegal) means of payment in some countries does not constitute the status as legal tender coupled with a general obligation of acceptance.
[3] Treuhand-Kammer (2014) Schweizer Handbuch der Wirtschaftsprüfung. Band “Buchführung und Rechnungslegung”. Treuhand-Kammer: Zürich. IV.2.18.1.