What you need to know (December 2022)
What’s the issue?
The recent failures of several companies involved in crypto-asset activities may signal a need for companies engaged in crypto-asset activities to reassess the adequacy of their financial statement disclosures. Preparers may not always consider the need to provide additional disclosures beyond the specific disclosure requirements in IFRS® Accounting Standards. Additional disclosures are needed when the accounting and minimum disclosures required do not enable the users of financial statements to understand the impact of particular transactions, other events, and/or conditions on the company’s financial position and performance.
When do these additional disclosure considerations usually arise?
A company’s transactions, events, and/or conditions may not be fully captured by the specific disclosure requirements in IFRS Accounting Standards because crypto-asset activities were not contemplated when applicable standards were created. Additional disclosures may also be needed for users of financial statements to understand company-specific aspects of transactions, other events, and/or conditions.
What additional disclosures do you need to consider providing?
IFRS Accounting Standards do not impose specific requirements for companies to disclose information about their crypto-asset activities. Therefore, financial statement preparers will need to consider whether to provide additional disclosures when compliance with the specific requirements in IFRS Accounting Standards is insufficient to enable users of financial statements to understand the impact of particular transactions, other events, and/or conditions on the company's financial position and financial performance. (IAS 1.17(c) and 31)
What are some examples that may give rise to these additional disclosure considerations for companies engaging in crypto-asset activities?
The examples presented below are not meant to be exhaustive:
- Crypto asset holdings
Companies that hold material crypto assets primarily account for these assets either as intangible assets or as inventory. However, the accounting for crypto assets within IAS 38, Intangible Assets and IAS 2, Inventory may not fully capture the nature and risk characteristics of the different types of crypto assets held because not all crypto assets within specific crypto asset categories share the same attributes and risk profile. As such, users of financial statements may not fully understand the company’s risk exposure to such assets. For example, an aggregated caption such as "digital assets” may not convey to users the nature and risk profile of the specific crypto assets held by the company. Companies may conclude that additional disclosures are needed to ensure users obtain all the information relevant to understanding their holdings of crypto assets and their financial statements.
- Crypto-asset lending arrangements
The lending of crypto assets is not clearly captured within the scope of any IFRS Accounting Standard. The accounting may not give rise to the derecognition of the crypto assets lent and the recognition of a new asset. As a result, users of financial statements may not be able to distinguish between crypto assets that were lent and those that are held directly or that there is credit risk associated with the crypto assets lent. Under such circumstances, users may need additional disclosures to better understand the lending transaction.
In considering additional disclosures to include in the financial statements for both crypto holdings and lending transactions, financial statement preparers may need to consider the business rationale for the holdings and/or transactions. Preparers should also factor in disclosure considerations under other IFRS Accounting Standards that apply to similar or related issues to facilitate the faithful representation of the transaction through additional disclosure.
Extracts from Relevant IFRS® Accounting Standards
|IAS 1, Presentation of Financial Statements
- In virtually all circumstances, an entity achieves a fair presentation by compliance with applicable IFRSs. A fair presentation also requires an entity:
- to select and apply accounting policies in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. IAS 8 sets out a hierarchy of authoritative guidance that management considers in the absence of an IFRS that specifically applies to an item.
- to present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information.
- to provide additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance.
- Some IFRSs specify information that is required to be included in the financial statements, which include the notes. An entity need not provide a specific disclosure required by an IFRS if the information resulting from that disclosure is not material. This is the case even if the IFRS contains a list of specific requirements or describes them as minimum requirements. An entity shall also consider whether to provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable users of financial statements to understand the impact of particular transactions, other events and conditions on the entity's financial position and financial performance.