When considering how to account for cryptocurrency (crypto) on a company’s financial statements, the simplest conclusion might be to classify it as a cash equivalent. After all, it is “currency,” right? U.S. Generally Accepted Accounting Principles (GAAP) defines cash equivalents as “short-term, highly liquid investments that are readily convertible to known amounts of cash, and near enough to maturity that they present insignificant risk of changes in value because of changes in interest rates.” Given crypto does not typically have a maturity date and is prone to significant volatility, the argument can certainly be made that these assets are not a “cash equivalent.” Additionally, crypto is not yet widely accepted as legal tender (even Tesla has stopped accepting crypto as payment). So, what guidance has the Financial Accounting Standards Board (FASB) issued regarding accounting for these crypto assets under GAAP? The short answer is – none!
The FASB has received three agenda requests thus far to tackle the issue of accounting for “digital currencies.” During the October 2020 meeting, the Board decided against adding the topic to the agenda, and “decided that it hadn’t risen to the level of pervasiveness [where] it should be one of the priorities on our agenda.” Essentially, the Board had taken the stance that crypto had not been widely adopted enough to warrant discussion at that point. Fast-forward to today, and crypto has been one of the most interesting topics in the financial sector over the past few years. Bitcoin alone went from trading around $7,000 on January 1, 2020 to over $65,000 late in 2021 – that is an increase of roughly 828%! While prices of crypto assets have certainly experienced fluctuation, acceptance of these digital currencies has steadily increased, with major adopters including companies such as Whole Foods, Microsoft, PayPal, and many others. As these assets continue to become a larger part of business activities, the question remains – how do we account for crypto?
The Association of International Certified Professional Accountants (AICPA) issued a practice aid related to best practices surrounding the accounting for, and auditing of, digital assets. For entities that fall within the scope of Accounting Standards Codification (ASC) 946, Financial Services – Investment Companies, the recommended accounting for crypto assets is simple: entities that hold cryptocurrencies as investments would account for them just as they would any other investment, and subsequently, measure the assets at their fair value. For entities that do not fall within the scope of ASC 946, the AICPA suggests applying the guidance in ASC 350, Intangibles – Goodwill and Other, and recording the crypto as an intangible asset (nonfinancial assets that lack physical substance). Since there is no limit on a crypto’s useful life at this point, these intangible assets would be considered “indefinite-lived” and would not be subject to amortization. Instead, these assets would regularly be tested, and possibly adjusted, for impairment.
Given the complexity of digital assets, it’s no surprise that the suggested accounting is not straightforward. For example, an entity that owns crypto might hold their assets directly, or indirectly through a third party. If this third party controls the private key, the question becomes who actually owns the asset, and whether the entity has the right to obtain the crypto from the third party. As one might imagine, the answer to these questions would determine the appropriate recognition. Additionally, whether the entity is holding crypto as a form of “investment” or accepting it as a form of payment would affect the recognition requirements. And of course, the significant volatility within the crypto market could certainly impact the accounting, and disclosures, related to these assets.
The glaring issue regarding accounting for crypto as an indefinite-lived intangible asset is related directly to the volatility within the market. Under GAAP, entities that hold crypto using this method would only recognize a decrease in value because of an impairment. For example, if a crypto asset began trading at a quoted value that was below a holding entity’s cost, this would typically be considered an impairment indicator, and could trigger an impairment of the asset. However, if the same crypto asset began trading at a quoted value that was higher than the holding entity’s cost, there would be no change in the associated value on the entity’s books; any increase in value would only be recognized as a gain upon disposition of the asset. As a result, impairment charges could negatively impact an entity’s profitability during the impairment period, even if the overall market value of the associated asset increases.
Many companies argue that the accounting under the intangible model does not necessarily yield meaningful results, and are pushing for a fair-value based measurement model. Under this model of recognition, companies would recognize gains and losses in value immediately, and would account for crypto assets in the same manner as other financial assets, not as indefinite-lived intangibles. However, it’s worth noting that the fair value model with regard to crypto assets could be an unforgiving model for companies, given the extreme volatility of crypto at this point.
On May 11, 2022, the FASB finally voted to add a project to its agenda to develop guidance for the recognition, measurement, presentation and disclosure of cryptocurrency. While there has not yet been any official guidance released, the FASB’s vote does affirm that the board recognizes the growing demand for guidance in this area. Much like cryptocurrency itself, the accounting practices are still evolving and it will be interesting to see where the FASB ultimately lands. However, until the board issues official guidance, companies that do not fall within the scope of ASC 946 should continue to recognize crypto assets as intangibles.
Mason Barringer, CPA, CFE
Mason Barringer, CPA, CFE is a Partner and Director of Assurance Services at DMJPS CPAs + Advisors in DMJPS' Greensboro office. He performs many of the firms audits, reviews, and other attestation engagements.
More posts