Businesses and executives are increasingly realizing there’s a whole new level of complexity lying just beneath crypto’s binary-coded surface, mainly how to account for it, how the accounting standards apply, and what it all means for the accounting team. Since digital assets and cryptocurrencies aren’t going anywhere, any company thinking about dipping its toe into the crypto waters needs to understand what it’s getting itself into.
FASB and digital assets
Guidance remains murky for a CFO or CAO looking for answers on digital assets and cryptocurrency accounting because, to put it bluntly, there really isn’t much guidance specific to them. The conversation begins by determining exactly how to classify these assets on the balance sheet. It can’t be cash, cash equivalents or a possible type of foreign currency because it must be accepted as legal tender and backed by a government. Likewise, cash equivalents must represent investments that are readily convertible to cash or have a near maturity that results in insignificant risk to the value.
Unfortunately, accounting for them as an investment or financial instrument is another swing and a miss. So where does that leave us? Most companies are classifying digital assets as a type of intangible asset. Granted, this still isn’t a great fit, but it’s the best we have under the current standards since it provides the broadest definition. Specifically, digital assets:
- Lack physical substance, and
- Are indefinite-lived as they have no prescribed life.
This means companies initially record digital assets at their acquisition cost and, thus, subject them to annual and trigger-based impairment tests. Needless to say, this opens up an entirely new can of financial accounting worms.
Given the constant volatility of these digital assets — and the fact that the impairment model for indefinite-lived intangible assets permits a write-down in value but no write-up for increases — the accounting outcomes can be hard for some to wrap their head around.
Even a single day’s significant decline in the value of a digital asset could warrant a trigger-based impairment test and a possible impairment charge. This is because unlike some financial instruments, the impairment framework for intangible assets is not an other-than-temporary-impairment model.
Performing impairment tests on digital assets
For impairment tests, it’s just following applicable guidance in ASC 350. In this case, that means looking at the asset’s fair value and comparing it to its carrying value. If the fair value is less, then you have to write it down and take an impairment charge.
But as we mentioned earlier, you cannot recover any value for previous impairment charges taken under current U.S. GAAP. Instead, you would only recognize any upside as a gain upon the sale of the intangible asset, and that’s just in cases where the sale price exceeds the adjusted carrying value.
What’s ahead for digital asset accounting
You’re not wrong for thinking digital asset accounting has a distinctly wild west feel to it right now. Therefore, it’s safe to assume regulators will standardize the applicable guidance at some point, particularly as these assets grow in popularity. Maybe that will entail moving to a fair value model, a carve-out definition of a financial instrument, or even an entirely new asset class.
Also, as an additional wrinkle, since some companies are accepting digital currencies in exchange for goods and services, that brings the ASC 606 rev rec framework into the fold. In this instance, the crypto would be a non-cash consideration from the customer and accounted for as such.
Proceed with caution
Ultimately, a company must weigh the good versus the bad when looking at digital or crypto assets. Yes, it’s another financial asset class that allows you to further diversify and possibly recognize some serious gains.
However, the accounting can be messy, and the significant volatility only amplifies the mess on the financial statements. Our advice is to proceed with caution and consult the AICPA practice aid on the topic, Accounting for and Auditing of Digital Assets. There, you’ll find additional insights and helpful use cases that might shed a valuable light on your specific accounting issue.
All things considered, there’s a fair amount of financial report MacGyvering when accounting for things like cryptocurrencies and digital tokens on the balance sheet. And it looks like it’s going to continue like that for the foreseeable future.