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Lack of clarity in disclosure of Cryptocurrency or digital assets in financial statements?

Introduction

Cryptocurrencies are gaining wider acceptance year after year all over the world as evident from the perennial increase in the volume of trade. But they are associated with high degree of risks including greater volatility in the prices besides the absence of government support. However, earlier there is no comprehensive law in India to regulate the crypto-trading and to ensure that illegal activities are not funded with crypto-related activities. Therefore, Government in India has introduced the provision under following ways to regulate the Crypto Currency or Virtual Currency in India.

  • Company Act: – As per the notification issued by the Ministry of Corporate Affairs (MCA) dated March 24, 2021 under which companies shall give details of crypto currencies or virtual currencies in financial. statement prepared in accordance with amended Schedule III of Companies Act, 2013 on or after Financial Year 2021-22. Where the company has traded or invested in Crypto currency or Virtual currency during the financial year, the following information shall be disclosed:
    • Profit or loss on transactions involving Crypto currency or Virtual currency;
    • Amount of currency held as at the reporting date;
    • Deposits or advances from any person for the purpose of trading or investing in Crypto currency or Virtual currency;
  • Income Tax Act: – In the Finance Act 2022, the Finance Minister introduce a new scheme to provide for taxation of virtual digital assets, tax on gift of virtual digital assets and Tax Deducted at Source (TDS) on payment for transfer of virtual digital asset to a resident. The budget proposed to introduce Section 115BBH to the Income Tax Act, 1961, which provides for charge of tax on income of transfer of any virtual digital asset at the rate of 30%, to be applicable from Assessment Year (AY) 2023-24 onwards; and Section 194S to provide for TDS on payment for transfer of virtual digital asset at the rate of 1% w.e.f. July 1, 2022.

Key Points for disclosure requirement of Crypto Currency or Virtual Currency in India

  • As per the requirement of Schedule III of Companies Act, 2013, it cannot be inferred that holding crypto currencies is legitimate. Schedule III only requires disclosures of transactions pertaining to cryptocurrencies. Whether holding cryptocurrencies are legitimate or not, is a matter of fact to be decided by the Reserve Bank of India.
  • There is no specific guidance given under Accounting Standards (AS) or Indian Accounting Standards (Ind AS) on accounting for cryptocurrency or virtual currency and as per IFRS Interpretation committee that holdings of cryptocurrencies should be accounted for under Ind AS-38 (i.e., as it is capable of being separated from the holder and sold or transferred individually, and is not a monetary asset, i.e., does not give the holder a right to receive a fixed or determinable number of units of currency) The IFRS Interpretation Committee concluded that holdings of cryptocurrencies should be accounted for under Ind AS-38 unless they are held for sale in the ordinary course of business, in which case Ind AS-2 Inventories would apply.
  • Crypto assets have different terms and conditions and the purpose for holding them differs among
  • holders. Hence, holders of a crypto asset will need to evaluate their own facts and circumstances and
  • assess the business model, in order to determine which accounting classification and measurement under current IFRS should be applied.
  • This disclosure shall be provided at the Consolidated Financial Statements (CFS) level if it is material to the group i.e., more than 10% of the respective financial statement line item in CFS.
  • Disclosures pertaining to cryptocurrencies should be made separately in the Balance Sheet and in the Statement of Profit and Loss.

Since, there is no specific guidance given under AS or Ind AS, therefore analogy can be drawn from guidance given under International Financial Reporting Standards (IFRS)

An entity is required by Ind AS-1 “Presentation of Financial Statements” to disclose any additional information that is relevant to an understanding of its financial statements. In particular, the IFRS
Interpretation Committee noted the following disclosure requirements in the context of holdings of
cryptocurrencies:

An entity provides the disclosures required by:

  • Ind AS-2 for cryptocurrencies held for sale in the ordinary course of business; and
  • Ind AS-38 for holdings of cryptocurrencies to which it applies Ind AS-38.
  • If an entity measure holding of cryptocurrencies at fair value less costs to sell, IFRS 13 Fair Value Measurement specify applicable disclosure requirements.
  • Applying paragraph 122 of Ind AS- 1, an entity discloses judgements that its management has made regarding its accounting for holdings of cryptocurrencies, if they are part of the judgements that had the most significant effect on the amounts recognised in the financial statements.
  • Ind AS-10 “Events after the Reporting Period” requires an entity to disclose details of any material non-adjusting events, including information about the nature of the event and an estimate of its financial effect (or a statement that such an e estimate cannot be made). For example, an entity holding cryptocurrencies would consider whether changes in the fair value of those holdings after the reporting period are of such significance that non-disclosure could influence the economic decisions that users of financial statements make on the basis of the financial statements.

Reason for Cryptocurrency should not be considered the financial assets or Cash of the entities.

Financial asset: Applying Paragraph 11 of Ind AS 32 defines a financial asset, that the holding of cryptocurrency is not a financial asset. This is because a cryptocurrency is not cash (see below). Nor is it an equity instrument of another entity. It does not give rise to a contractual right for the holder and it is not a contract that will or may be settled in the holder’s own equity instruments.

Cash: As per the description of cash in paragraph AG3 of Ind AS 32 implies that cash is expected to be used as a medium of exchange (i.e., used in exchange for goods or services) and as the monetary unit in pricing goods or services to such an extent that it would be the basis on which all transactions are measured and recognised in financial statements.

Some practical challenges in the treatment of Crypto Currency or Virtual Currency in Financial Statement.

Cryptographic assets might also be held by an entity on behalf of its customers. Some examples are:

  • An entity that operates a trading platform that enables its customers to exchange different cryptographic assets, or to exchange fiat currency for a cryptographic asset.
  • An entity (such as a bank or similar financial services entity) that offers custodian services for its customers’ cryptographic assets. In this case, customers lodge cryptographic assets with the entity for safe keeping.
  • The key accounting question is whether or not such holdings of cryptographic assets on behalf of customers should be recorded on or off the entity’s balance sheet under IFRS.
  • There may be difficulties in the valuation of Cryptocurrency or Virtual currency in the absence of an active market.

Nishant Aggarwal, Director, SW India
Shubham Gupta, A. Manager, SW India

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