Fair value accounting

Imagine a purchase for 100 USD, US dollars. Estimated fair value today is 120. The difference of 20 does not automatically mean the company can report that profit. First we need the asset’s accounting treatment and where any change is recorded. IFRS 13, part of the International Financial Reporting Standards, explains fair value measurement when another standard requires or permits it. It does not itself require every asset to be remeasured. “How do we measure value?” is different from “When and where do we report it?” [1]

IFRS 13 considers the price received to sell an asset, or paid to transfer a liability, in an orderly transaction at the measurement date. This is not a forced sale or the amount the owner hopes to receive. The accessible principal market, with the greatest volume and activity, takes priority. If there is no principal market, the most advantageous accessible market is used under the standard’s rules. Choosing the highest number on any exchange is not enough. The date, time and company’s access to the market help explain the result. [1]

In our example the price is 100 USD and the selling fee is 3. Net receipts, the money after that fee, are 97. Under these assumptions, fair value is 100, not 97: IFRS 13 does not deduct transaction costs from it. Fair value less costs to sell is a different measure. Transport has a separate role. For a physical commodity whose location is an asset characteristic, costs of transport to the market may need to be reflected. Do not confuse that case with a normal exchange commission. [1]

IFRS 13 places inputs in a hierarchy. Level 1 uses an unadjusted price for an identical asset on an accessible active market; Level 2 uses other observable inputs; Level 3 uses unobservable inputs, estimates of market participants’ assumptions without direct market data. The lowest significant input in the hierarchy, meaning the significant input with the lowest priority, determines the level; levels are not averaged. Our own model illustrates sensitivity: a payment of 100 in exactly a year has a present value at a required yield of 5% of about 95.24, or at 10% of about 90.91, without default or costs. This is not a BTC exchange quote. Level 1 identifies an input type, not a safe investment. [1]

This is an accounting aside: US GAAP, generally accepted accounting principles in the United States, is not the same as IFRS. The Financial Accounting Standards Board (FASB), the US accounting standard-setter, introduced subsequent fair value measurement for defined crypto assets through ASU 2023-08, with changes in net income. All conditions must hold: the asset is intangible, without physical substance, under the relevant accounting definition; it provides no enforceable claims on underlying goods, services or other assets; it is created or resides on a distributed ledger, a record shared across participants; it is cryptographically secured and fungible, with interchangeable units; and it is not created or issued by the reporting entity or a related party. An NFT, a non-fungible token, is therefore not automatically included. The rule applies to fiscal years beginning after 15 December 2024, so normally from 1 January 2025 for a calendar-year company; early adoption was permitted. [2]

Take our own subsequent-measurement example under that US regime. A company holds 2 BTC at 50000 USD per BTC, a value of 100000. At a price of 60000, value becomes 120000 and remeasurement is +20000. Without a sale, cash received from remeasurement is 0. Price then falls to 45000: value is 90000 and the next-period change is −30000, not −10000 measured from the original base. The company still has 2 BTC. Coin quantity, valuation profit and cash received are three different things. The example excludes taxes, fees and exchange-rate effects. [2] [5]

In June 2019 the IFRS Interpretations Committee considered a defined type of cryptocurrency. For holdings for sale in the ordinary course of business it applied IAS 2, the inventory standard; otherwise IAS 38 for intangible assets. Inventory can include an intangible item, not just goods in a warehouse. Commodity broker-traders meeting the relevant IAS 2 exception use fair value less costs to sell. IAS 38 permits a revaluation model subject to active-market conditions. Even so, it does not copy every FASB rule. First establish what the company holds, why it holds it and which regime governs its accounts. [3] [4]

Our USD reconciliation starts with carrying value of 100000. Additions of 30000, disposals at carrying value of 20000 and remeasurement of 20000 give: 100000+30000−20000+20000 = 130000. Disposals here mean the recorded value of assets removed from the books, not necessarily the cash received on sale. This reconciliation does not replace a cash flow statement showing actual cash receipts and payments. Read it alongside coin quantities, acquisition costs, valuation evidence and sale restrictions. Even a high carrying value does not itself prove control of the private keys that authorise spending BTC, or the ability to withdraw assets from a custodian. [2] [5]