On July 28, 2022, the Portuguese Commission of Accounting Standards (the “CNC”) published guidelines on the accounting recognition of cryptocurrencies and the underlying income. Under these guidelines:
1) The accounting recognition of cryptocurrencies as assets will be conditional on an entity controlling them, as a result of past events, and on such entity expecting future economic benefits resulting from them.
2) If cryptocurrencies fulfil these requirements, their different configurations and utilities may imply different accounting classifications (and specific underlying accounting regimes): (i) financial instruments (Portuguese accounting rule 27); (ii) inventory (Portuguese accounting rule 18); or (iii) intangible assets (Portuguese accounting rule 6).
3) Financial instruments denote contractual arrangements giving rise to financial assets and liabilities for their corresponding holders and issuers. For the purposes of these classification, financial assets and liabilities include money, equity instruments, contractual rights, liabilities to receive and exchange money or other financial assets in favorable conditions and derivative instruments (albeit subject to certain conditions).
4) Inventory includes assets held for sale within the ordinary course of the corresponding holders’ entrepreneurial activities, provided that they are not financial instruments, under Portuguese accounting rule no. 27.
5) Intangible assets are identifiable, non-monetary assets without physical substance that do not qualify as financial instruments (under Portuguese accounting rule 27), inventory (under Portuguese accounting rule 18), or a different classification under the Portuguese accounting rules and GAAP.
Although the CNC has not addressed this issue specifically, crypto assets whose fair market value (FMV) is based on the value of a single currency that is legal tender (stable coins) could, hypothetically, qualify as cash equivalents under the definition provided by Portuguese accounting rule 2, insofar as: (i) they may be readily converted into fiat currency; (ii) they are subject to an immaterial degree of volatility; and (iii) they are short- term investments of their holders. However, considering that most investments in these crypto assets are generally not short term, this classification must be justified on a case-by-case basis.
In what specifically pertains to cryptocurrencies, and based on the CNC’s interpretation:
1) Cryptocurrencies may qualify as financial instruments where they are representative of contracts (including smart contracts) giving rise to financial assets and liabilities (e.g., contractual rights or liabilities to receive or exchange money or other financial assets in favorable conditions and equity instruments) for their corresponding holders and issuers, respectively. For financial instruments tradeable in public markets and whose FMV may be reliably determined, this criterion should be considered for the purposes of recognition. Under this accounting regime, positive or negative variations in the FMV of these crypto assets should be reflected in the relevant holders’ P&L accounts.
2) Cryptocurrencies that do not qualify as financial instruments held by traders and brokers to resell them or otherwise profit from market fluctuations in a short term may be accounted for as inventory and be valued at their FMV. Under this accounting regime, positive or negative FMV variations should be reflected in the relevant holders’ P&L accounts.
3) Cryptocurrencies that do not qualify as inventory or financial instruments may qualify as intangible assets, generally valued at their FMV, provided that there is an active market for the trading of such intangible assets. Under this accounting regime, positive variations in the FMV of these crypto assets should be reflected in the relevant holders’ equity accounts, as a revaluation surplus. Conversely, negative variations in excess of the amounts covered by revaluations surplus should also be reflected in the relevant traders’ or brokers’ P&L accounts.
In addition to these clarifications concerning the accounting treatment of cryptocurrencies, the CNC anticipates that further insights into the accounting treatment of other crypto assets (e.g., utility, investment and non-fungible tokens) may be provided in the future, contingent on further developments to the accounting standards in force at an international level.
Simplified chart on the accounting recognition of non-hybrid cryptocurrencies
* Until intangible assets cease to be recognized (e.g., upon a future disposal)