Cryptocurrency and digital asset accounting
Businesses and executives are increasingly realizing that there is a whole new level of complexity beneath the binary-coded surface of crypto, primarily how to account for it, how accounting standards apply, and what it all means for the accounting team. Since digital assets and cryptocurrencies aren’t going anywhere, any business considering getting into crypto waters needs to understand what they’re getting into.
FASB and digital assets
The guidance remains hazy for a CFO or CEO looking for answers on digital assets and cryptocurrency accounting because, to put it bluntly, there really isn’t a whole lot of guidance specific to them. The conversation begins with determining exactly how to classify these assets on the balance sheet. It cannot be cash, cash equivalents or any type of foreign currency, as it must be accepted as legal tender and backed by a government. Similarly, cash equivalents should represent investments that are readily convertible to cash or approaching maturity, resulting in negligible risk to value.
Unfortunately, accounting for them as an investment or financial instrument is another swing and a miss. So where are we? Most companies classify digital assets as a type of intangible asset. Granted, it’s still not a great fit, but it’s the best we’ve got by today’s standards because it provides the widest definition. Specifically, digital assets:
- Lack of physical substance, and
- Are indefinitely useful because they do not have a prescribed lifespan.
This means that companies initially record digital assets at their acquisition cost and therefore subject them to annual and trigger-based impairment tests. Needless to say, this opens up a whole new box of financial accounting worms.
Given the constant volatility of these digital assets – and the fact that the indefinite-lived intangible asset impairment model allows for impairment in value but not impairment for increments – accounting results can be difficult to understand for some. .
Even a single-day significant decline in the value of a digital asset could warrant a trigger-based impairment test and possible impairment charge. Indeed, unlike some financial instruments, the intangible asset impairment framework is not a sustainable impairment model.
Performing impairment tests on digital assets
For impairment testing, it is sufficient to follow the applicable guidelines in UPS 350. In this case, that means looking at the fair value of the asset and comparing it to its book value. If the fair value is lower, you must depreciate it and recognize an impairment.
But as we mentioned earlier, you cannot recover any value for prior impairment charges taken under current US GAAP. Instead, you will only recognize any benefit as a gain on the sale of the intangible asset, and only in cases where the sale price exceeds the adjusted book value.
What future for digital asset accounting
You’re not wrong to think that digital asset accounting has a distinct Wild West feel to it right now. Therefore, it is safe to assume that regulators will standardize applicable guidelines at some point, particularly as these assets gain popularity. This may mean moving to a fair value model, a separate definition of a financial instrument, or even a whole new asset class.
Also, as an added wrinkle, since some businesses accept digital currencies in exchange for goods and services, it brings the ASC 606 rev rec frame in the fold. In this case, the crypto would be a non-monetary consideration of the client and counted as such.
Proceed with caution
Ultimately, a business must weigh the good against the bad when looking at digital or crypto assets. Yes, it is another class of financial assets that allows you to diversify further and possibly make some serious gains.
However, accounting can be messy, and significant volatility only amplifies the messiness of financial statements. Our advice is to proceed with caution and consult the AICPA practice aid on the subject, Accounting and auditing of digital assets. There you will find additional information and useful use cases that could shed valuable light on your specific accounting problem.
All things considered, there is a fair amount of MacGyvering financial reporting when accounting for things like cryptocurrencies and digital tokens on the balance sheet. And it looks like it will continue like this for the foreseeable future.