According to PwC, “cryptographic assets (crypto assets) are transferable digital representations that are designed in a way that prohibits their copying or duplication. The technology that facilitates the transfer of crypto assets is referred to as blockchain or distributed ledger technology. Blockchain is a digital, decentralized ledger that keeps a record of all transactions that take place across a peer-to-peer network and enables the encryption of information.”
The IFRS Conceptual Framework defines an asset as “a present economic resource controlled by the entity as a result of past events” and an economic resource as “a right that has the potential to produce economic benefits.” According to PwC, crypto assets “will often meet the definition of an intangible asset.” A common form of crypto asset is cryptocurrency, which are expected to function as a medium of exchange or as a store of value.
Relatively few companies have invested in crypto assets. One early adopter is Tesla, which early in 2021 invested a significant amount in Bitcoin, which was invented in 2008 and was therefore the first cryptocurrency.
For a period in 2021, Tesla even allowed customers to purchase its vehicles using Bitcoin. Tesla’s Bitcoin Payment Terms & Conditions included the following text:
All products are priced in U.S. Dollars. If you choose to make a payment using Bitcoin, you must pay an amount of Bitcoin that is of equivalent value to the U.S. Dollar purchase price of the product that you purchase. We will provide you with a U.S. Dollar price for the product or service that you are purchasing, as well as a Bitcoin equivalent price (the “Bitcoin Price”). You must initiate the transfer of the Bitcoin Price to us within the time period that we provide to you together with the Bitcoin Price (the “Bitcoin Price Window”). If you do not initiate the transfer of the Bitcoin Price to us within the Bitcoin Price Window, the Bitcoin Price will expire, and we will provide you with a new Bitcoin Price and Bitcoin Price Window upon your request.
Even governments have shown interest in cryptocurrencies. The government of Venezuela launched its own cryptocurrency in 2018. El Salvador adopted Bitcoin as legal tender and cryptocurrencies like Bitcoin have become popular in Latin America in response to difficulties with fiat currencies in several countries.
Required
Answer all questions listed in each section below.
Cryptocurrency as intangible assets
According to its 10-K filing (annual report), Tesla’s “digital assets are considered indefinite-lived intangible assets under applicable accounting rules. Accordingly, any decrease in their fair values below our carrying values for such assets at any time subsequent to their acquisition will require us to recognize impairment charges, whereas we may make no upward revisions for any market price increases until a sale.”
Tesla’s 10-K also says “during the year ended December 31, 2021, we purchased and received $1.500 billion of Bitcoin. During the year ended December 31, 2021, we recorded $101 million of impairment losses on such digital assets. We also realized gains of $128 million inconnection with selling a portion of our holdings in March 2021. Such gains are presented net of impairment losses in Restructuring and other in the consolidated statement of operations. As of December 31, 2021, the carrying value of our digital assets held was $1.260 billion, which reflects cumulative impairments of $101 million. The fair market value of such digital assets held as of December 31, 2021 was $1.990 billion.”
In addition, Tesla received $5 million in Bitcoin used as payment by customers purchasing Tesla vehicles.
1. Provide journal entries for the events described above (purchase, impairment, sale, use of Bitcoin in purchase, revaluation, etc.) using the (US GAAP) accounting treatment described in the text above. We subsequently refer to these events as the “2021 Tesla Bitcoin events”.
2. Provide journal entries for the 2021 Tesla Bitcoin events, but under IAS 38 using the cost model.
3. Provide journal entries for the 2021 Tesla Bitcoin events, but under IAS 38 using the revaluation model.
4. A patent confers upon its holder the sole right to make, use, and sell an invention for a set period of time. The economic benefits of a patent might come from using the patent in production of goods for sale or from licensing the patent to other parties in exchange for cash. Provide two other examples of intangible assets and in each case identify the potential economic benefits it provides.
5. What is the nature of the economic benefits offered by cryptocurrency? How do these economic benefits differ from those of the other kinds of intangible assets you identify? How are these similar?
Cryptocurrency versus currency
IFRS provides no explicit definition of the term cash. However, IAS 32 indicates that “currency (cash) is a financial asset because it represents the medium of exchange and is therefore the basis on which all transactions are measured and recognised in financial statements.” IAS 21 defines monetary items as “units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.”
PwC argue that cryptocurrencies do not have some common properties of cash and currency. Specifically, “cryptocurrencies are not legal tender and mostly are not issued or backed by any government or state.” Additionally, “cryptocurrencies are currently not capable of setting prices for goods and services directly.”
6. Suggest reasons why Tesla would give customers the option to purchase vehicles using Bitcoin? What inferences can you draw from the Bitcoin Payment Terms & Conditions about Tesla’s appetite for exposure to the risks and returns associate with Bitcoin? (Note that the Bitcoin Price Window was as short as 30 minutes.)
7. Tesla, headquartered in the United States, allows consumers in many countries to purchase Tesla vehicles using their respective local currencies. For example, Australian customers can purchase using Australian dollars. Would you expect such purchases to involve “Australian Dollar Payment Terms & Conditions” similar to the Bitcoin Payment Terms & Conditions listed above? What differences in terms would you expect to see with Australian dollar purchases compared with those for Bitcoin purchases? Why?

8. What implications would there be if Bitcoin were deemed a currency for financial reporting purposes? Briefly discuss how this change would affect the various financial statements of a firm like Tesla (income statement, balance sheet, and statement of cash flows) relative to treating Bitcoin as an intangible asset. (For this question, assume that financial reports are, apart from deeming Bitcoin as a currency, prepared in accordance with IFRS.)
Cryptocurrency versus financial assets
9. It is widely agreed that cryptocurrencies such as Bitcoin are not considered financial assets with the definition of IAS 32. Discuss why cryptocurrencies generally fail to meet the definition of a financial asset.
10. Provide the journal entries for the 2021 Tesla Bitcoin events assuming that the Bitcoin is treated as a financial asset. (For this question, assume that financial reports are, apart from deeming Bitcoin as a financial asset, prepared in accordance with IFRS.)
11. Briefly discuss how the definition of “financial asset” in paragraph 11 in IAS 32 might be expanded to include cryptocurrencies? Can you identify features of cryptocurrencies that would help distinguish these from assets, such as intangible assets, that would be important to exclude from the definition of “financial asset”?

Cryptocurrency as inventory
Another possible way of accounting for cryptocurrency would be as inventory. Under IAS 2, inventory is accounted for as cost and inventory sold results in the recognition of the cost of sales as an expense (being the cost of inventory transferred in the sale) and revenue from the cash or other monetary assets received in exchange.
The business of Hut 8 Mining Corp is primarily in mining of digital assets “with an operational focus on utilizing specialized equipment to solve complex computational problems to validate transactions on different blockchains and receiving Bitcoin in return for successful services. Additionally, the Company operates cloud and colocation date centre facilities in Canada targeting enterprise customers seeking high performance computing services.”
12. While Hut 8 Mining Corp applies IFRS, it does not account for cryptocurrency (“digital assets”) as inventory using IAS 2. From examination of the financial statements of Hut 8 Mining Corp for the year ended 31 December 2021, would it be appropriate for Hut 8 Mining Corp to account for its cryptocurrency as inventory under IAS 2?
13. Describe the accounting used by Hut 8 Mining Corp to account for cryptocurrency. (Include in your discussion information on how Hut 8 Mining Corp recognizes revenue from mined cryptocurrency, how it handles changes in fair values for cryptocurrency, and how the costs of mined cryptocurrency are recognized as expenses.)
14. Briefly discuss how Hut 8 Mining Corp’s financial statement would be affected if Hut 8 Mining Corp accounted for its cryptocurrency as inventory under IAS 2 and recognized revenue on mined cryptocurrency only when sold to outside parties.
Accounting for cryptocurrency
15. In light of your analysis and discussion above, what do you believe would be the best way to account for cryptocurrency? In answering this question, you may focus on the transactions and business models of Tesla and Hut 8 Mining Corp. If you recommend a common accounting treatment for both firms, or different accounting treatments for these two firms, justify your recommendation. In answering this question, consider that the objective of general-purpose financial reporting is “to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity.”