Annual Financial Statements With Cryptocurrencies in Germany

It is already being disputed whether a cryptocurrency can even be considered an economic asset in Germany. Some believe that inclusion in the balance sheet per se is out of the question, as the transfer regulations in blockchain technology are designed in such a way that the corresponding coins are always subject to a condition precedent. Even the fact that the fulfillment of the condition has such a high probability that it almost becomes a certainty does not change the fact that every condition precedent prevents the financial reporting of a balance. The prevailing opinion does not maintain this.

Crypto assets can therefore appear in numerous forms in financial statements. Depending on their use, they can be part of fixed assets (in the case of long-term assets) or part of current assets (in the case of rapid continued use). However, they can also take the form of other intangible assets or inventory.

Like money, they can be used to pay for goods or services and thus result in both expense and income. They may serve to finance the company or as advance payments on future sales such as vouchers. As they are not denominated in euros, a valuation in the form of a conversion must be performed on a regular basis.

Crypto assets are not stored in traditional bank accounts, but in wallets. Transfers in these securities accounts must be correctly recorded for successful year-end closing.

Accounting issues with wallets may seem trivial to many accountants at first. One might think that a simple analogy to foreign currency accounts would make the point. But, unfortunately, this is not the case.

There are also a large number of other issues that do not immediately stand out during the first professional review of the topic. In the following, we would like to give some examples:

The obvious comparison with bank account transactions does not readily apply, since, in the case of a bank account, there is a claim against the bank in the amount of the balance. With cryptocurrencies, this is usually the case only for balances on exchanges. There is no such requirement on individual wallets.

If there are cryptocurrency holdings as of the balance sheet date, the value at which these are to be reported in the balance sheet must be accounted for:

• Are the acquisition costs decisive or can/must a partial value depreciation be made?
• What should be done if values have increased again since the balance sheet date?
• Is this a value-generating or a value-creating event with different legal consequences for the balance sheet?

For exchange-traded cryptocurrencies, one will be able to draw the analogies to listed securities here. In addition, however, it must be reviewed whether the cryptocurrencies represent inventory, if applicable, in the event it is the purpose of the company to trade in cryptocurrencies. If this is the case, check which consumption sequence method is to be used (fifo, lifo or the average method).

Similar issues arise when services or supplies are sold against cryptocurrencies and the amounts have not yet been settled as of the balance sheet date. Is the payment made with cryptocurrencies optional instead of euros in lieu of performance, or was the intent to make the payment exclusively with cryptocurrencies?

Analogies can be drawn with foreign currencies when it comes to valuing liabilities denominated in cryptocurrencies. In principle, liabilities are entered in the accounts with the value they have at the time of the exchange of services. But what should be done if the exchange rates have risen or fallen as of the balance sheet date? When should any exchange rate fluctuations be recognized in the balance sheet?

Consultants regularly provide services to German crypto startups. Very often, compensation is then made in self-issued cryptocurrencies. Of course, the service provided represents revenue. However, there is often an inconsistency between the time of performance and the time of payout, particularly since cryptocurrencies are, after all, often still being created.

The evaluation issues surface here at different times as well:

• When is which value decisive, particularly if there is no stock exchange listing?
• What if the values change drastically between when the service is rendered and the later date of payment?

Particularly in the foundation phase, very low prices are usually called for initially, which can then rise rapidly as individual milestones are attained. At individual periods, different valuations here can cause massive differences in profits.

Crypto companies face significant challenges not just with financial reporting, but already with monthly accounting. One transaction on the blockchain can become up to four sets of bookings, some of which also still require multiple conversions (from crypto to foreign currency to euro). This makes the ongoing accounting of crypto transactions a considerable obstacle for companies.

While isolated crypto transactions can still be dealt with using the standard tools of an accountant, conventional programs reach their limits when it comes to accounting for thousands or hundreds of thousands of movements on exchanges. Software programs on the market are usually designed to provide tax reports for private crypto investors. These tools do not support operational accounting.