There has recently been turmoil in the world of cryptocurrencies and cryptocurrency exchanges. So, are companies disclosing enough about their holdings of cryptocurrencies and other crypto-assets? If they are not, should the IASB take any action?
This post discusses the following:
- Investors need to know that a company holds cryptocurrency
- Existing generic disclosure requirements
- Just relying on existing generic disclosure requirements
- Specific disclosure requirements for crypto-assets?
- Adding a specific example?
- Educational material?
For brevity, in the rest of this post, I use the term cryptocurrencies to cover not only cryptocurrencies, but also other crypto-assets, and liabilities denominated in cryptocurrencies or in other crypto-assets. (In a few places, I mention liabilities explicitly, for clarity.)
Investors need to know that a company holds cryptocurrency
If a company has a significant holding in cryptocurrencies, investors will want to know that fact.
If a company does not disclose holdings in cryptocurrencies, investors want this to be because the company does not hold any cryptocurrencies—not because the company is simply failing to disclose its holdings.
Investors may also want to know other things about how much a company uses cryptocurrencies:
- the amount of (realised and unrealised) gains and losses on cryptocurrencies during the period; and
- the size of cryptocurrency holdings during the year, even if the company holds none of them at the year end. A company with a large holding might sell all its holdings shortly before the year to remove from its balance sheet (statement of financial position) all signs of this activity (‘window dressing’).
Finally, if a company has liabilities denominated in cryptocurrencies, investors presumably also want similar information about those liabilities.
Existing generic disclosure requirements
IFRS Standards do not impose specific requirements for companies to disclose information about cryptocurrencies. But the standards do impose generic requirements applying to all assets and liabilities. These include requirements to present or disclose:
- additional line items in the statement of financial position when such information is relevant to an understanding of the company’s financial position (IAS 1 Presentation of Financial Statements, paragraphs 55-59)
- further subclassifications of the line items presented in the statement of financial position (IAS 1, paragraphs 77-78)
- additional line items in the statement(s) presenting profit or loss and other comprehensive income when such information is relevant to an understanding of the company’s financial performance (IAS 1, paragraphs 85 and 86)
- the nature and amount of material items of income or expense (IAS 1, paragraphs 97 and 98)
- major sources of estimation uncertainty (IAS 1, paragraphs 125-133)
- accounting policies (IAS 1, paragraphs 117-124)
Other existing disclosure requirements
In 2019, the IFRS Interpretations Committee published an agenda decision explaining when IAS 2 Inventories or IAS 38 Intangible Assets applies to holdings of cryptocurrencies. If one of those standards applies, the disclosure requirements in that standard also apply.
Applying the generic requirements in disclosing crypto-assets
Many companies want to inform investors fully about their financial performance and financial position. In complying with the generic requirements mentioned above, if those companies have cryptocurrency holdings so large that information about them is material, those companies will naturally disclose:
- the fact that those holdings (or liabilities) exist; and
- their carrying amount.
At times such as now, investors may worry whether companies are disclosing all such assets and liabilities. At such times, if a company has none of these assets or liabilities, the company might want to disclose that fact. In IFRS Practice Statement 2 Making Materiality Judgements, example K illustrates such thinking. In that example, a bank has very little debt from a country in severe financial difficulties. The bank concludes that the small size of its exposure is material information. Thus, the bank discloses the fact that its disclosure is small.
Meeting investors’ needs
The IASB could aim to meet investors’ needs for information about cryptocurrency holdings by:
- just relying on existing generic disclosure requirements;
- developing specific disclosure requirements for cryptocurrencies;
- developing an example that illustrates applying exciting generic disclosure requirements to cryptocurrencies; or
- developing educational or explanatory material.
Just relying on existing generic disclosure requirements
Although many companies do keep investors fully informed about their financial performance and financial position, investors may doubt whether all companies always do that. Such doubts may be higher when markets are in turmoil or when new instruments and markets are developing.
To ease those doubts in today’s environment, some people may feel that the IASB should introduce specific disclosure requirements for cryptocurrencies held (and for liabilities denominated in cryptocurrencies).
What do investors need to know about cryptocurrency holdings?
Arguably, relying on existing generic disclosure requirements might be enough—at least in theory, for those companies making a genuine attempt to provide full disclosure—to require companies to disclose the fact that they have large cryptocurrency holdings. But that might not be enough to require disclosure of everything that investors want to know about such holdings.
If a company has large holdings of cryptocurrencies (or has large liabilities denominated in cryptocurrencies), investors probably don’t just want to know that these holdings exist. They may want to know, for example:
- the carrying amount of cryptocurrencies and other crypto-assets;
- the fair value of these assets (if different from their carrying amount);
- gains and losses on these assets during the period;
- the risk profile of these assets;
- how active the markets in these assets are and how mature those markets are;
- whether any of the assets held have been given as collateral and whether any other assets have been given as collateral for transactions in such assets; and
- the accounting policy for these assets.
Investors presumably also want similar information about a company’s liabilities denominated in cryptocurrencies.
Existing generic requirements might be enough to require disclosure of some of that information, but may not be enough to require disclosure of all of it.
Specific disclosure requirements for crypto-assets?
Introducing specific disclosure requirements for cryptocurrencies might:
- make it more likely that companies would disclose all significant cryptocurrency holdings. This step could make investors more confident and perhaps also improve financial stability.
- lead to companies disclosing information that investors need— but that companies might not disclose if they apply only existing generic disclosure requirements.
But adding new specific disclosure requirements could also have disadvantages:
- defining which assets (and liabilities) are within the scope of the requirements could be difficult. That difficulty wouldn’t matter for those companies doing their best to give full disclosure, but could lead to inadequate disclosure by those companies aiming to disclose the absolute minimum required by IFRS Standards.
- the specific disclosure requirements wouldn’t apply if new instruments developed in the future fall outside the scope of the requirements.
- adding new requirements to an accounting standard takes time.
- adding new requirements to an accounting standard always causes costs: (a) costs to people responding to the exposure draft; (b) costs to investors using the output of applying the final standard; and (c) costs to preparers, auditors, regulators and legislators implementing the final standard.
Adding a specific example?
The IASB could add to IAS 1 a specific example on cryptocurrencies. An example covering cryptocurrencies could illustrate how an entity might apply generic requirements, such as those mentioned above.
Adding an example may be better than adding specific new requirements:
- an example would still illustrate the generic requirement, but it would also highlight more prominently a fact pattern in which the generic requirement might well apply.
- defining the scope would not be important. Companies would need to consider the general requirements even if their own case falls outside the particular case described in the example.
- if new instruments emerge, there would be no need to consider updating the example to refer to them explicitly.
One disadvantage of a specific example is that such an example should, arguably, not discuss useful disclosures that are not required by existing generic disclosure requirements.
The IASB could issue educational material directly. Or the IFRS Interpretations Committee could issue an agenda decision, including explanatory material explaining how IFRS Standards apply to a transaction or fact pattern described in the agenda decision.
Developing educational material or an agenda decision would be quicker than amending a standard, and would cause less cost.
On the other hand, because such material is not part of a standard, some companies may ignore it. Also, educational material should, arguably, not discuss useful disclosures that are not required by existing generic disclosure requirements.
Will the IASB require better disclosure soon?
The IASB’s work plan includes no project on cryptocurrencies. After its recent agenda consultation:
- the IASB did not add to its work plan any project on accounting for cryptocurrencies and related transactions. The IASB noted that such transactions may not be prevalent in many jurisdictions and may not have a pervasive effect on the financial statements of many companies. Also, such a project would be complex and might be premature in a new and rapidly evolving ecosystem.
- the IASB added to its research pipeline a future project on Intangible Assets. Among other things, that project will consider whether cryptocurrencies should remain within the scope of IAS 38 Intangible Assets. It will be several years before that project could improve disclosure.
For more information on cryptocurrencies and other crypto-assets, please see Spotlight—Crypto-Assets: The Standard Setting perspective in the IASB’s Investor Update April 2019. https://www.ifrs.org/investor-centre/investor-update-hub/april-2019/
In my judgement, in today’s environment there is an urgent need for companies to tell investors when they hold cryptocurrencies and other crypto-assets, and when they have liabilities denominated in those assets.
Theoretically, applying existing generic disclosure requirements might lead to companies disclosing this information, if companies apply those requirements in the spirit of full disclosure. But to make that more likely to happen in practice, the IASB could consider providing something more specific to supplement the generic requirements.
In my view, the most timely and effective addition the IASB could make would be by adding to IAS 1 a specific example illustrating how companies might be able to comply, in a particular fact pattern, with generic disclosure requirements that already exist.
The IASB could add such an example fairly quickly. Although such an example might not cover disclosure of everything investors want to know, it would meet the most urgent need—for companies to tell investors when they hold cryptocurrencies.