As the world steadily moves into the uncharted territory of cryptocurrency, more and more questions arise regarding the protection, regulation, and organization of digital currency. In December of 2019, the American Institute of Certified Public Accountants (AICPA) issued a practice aid intended to provide guidance on how to account for and audit digital assets. While audit concerns will be covered in a future report, this latest report—provided by the AICPA’s Digital Asset Working Group—is non-authoritative guidance intended to detail accounting issues related to digital assets.
The document includes the standard ‘facts and circumstance’ caveat, that the accounting treatment for specific crypto and related transactions will be driven by the specific terms, form, underlying rights, and obligations of the digital asset. No new accounting standards are issued in the paper. Instead, the AICPA details how to apply existing U.S. Generally Accepted Accounting Principles (GAAP) to crypto assets. We’ve taken a look at this extensive advice and summarized its key points.
1. Classification for Purchased Crypto
- Crypto is not classified as cash or a cash equivalent
- It’s not a legal tender
- It’s not backed by a sovereign government
- It has no maturity date
- Crypto is not classified as a financial instrument or financial asset
- It doesn’t represent an ownership interest
- It doesn’t represent a contractual right to receive cash or another financial instrument
- Crypto is not classified as inventory (even if it’s held in the ordinary course of business)
- It isn’t tangible, and therefore can’t be inventory
- Generally, crypto assets meeting specific requirements will be classified as intangible assets under ASC 350
- They are measured at cost
- Examples of crypto assets accounted for as intangible assets under ASC 350 include Bitcoin and Ether
As you consider the classification of purchased crypto, always remember that (as required by ASC 350) you’d still need to determine if the crypto asset had a definite life or indefinite life. But according to the guidance, it would generally be concluded that crypto assets have an indefinite life.
2. Classification and Measurement for Crypto Received in Exchange for Goods or Services
This is really asking how ASC 606 guidance interfaces with the ASC 350 guidance cited above. Generally, you’d record the digital asset at fair value as required for noncash consideration under ASC 606. There are lots of variations possible in these types of arrangements (such as receipt of digital token subsequent to the transfer of goods or services), so make sure you review each situation carefully under ASC 606.
3. Subsequent Accounting for Digital Assets Classified as Indefinite-Lived Intangibles
- You’d be required to follow the impairment guidance applicable to any other indefinite- lived intangible
- The same frequency of the analysis is required
- The same relevant facts and circumstances should be assessed to determine if an impairment has taken place
- If an impairment is recorded, a new accounting basis is established and subsequent “write ups” are not permitted
- If your digital asset trades on a market at a price below your carrying value, that will generally be an indicator that the digital asset is more than likely impaired
- Impairment analyses are required any time events or circumstances indicate an impairment may be likely
- These events can occur in the middle of a reporting period
- An impairment loss may be required even if the fair value of the digital asset was subsequently recovered
- These impairment analyses would usually need to be done on each digital asset individually
- Each digital asset would be its own unit of account for purposes of the impairment analysis
- This means you can’t perform an impairment analysis of multiple digital assets on a “portfolio basis”
4. Measuring Costs Basis of Digital Assets Classified as Indefinite-Lived Intangibles
- Where possible, you should track the specific cost of units obtained at different times and use those values when selling or transferring digital assets
- In some cases, the fungibility of the digital assets makes specific identification impossible
- In these cases, an entity can then select a “reasonable and rational” methodology to be applied consistently
5. De-Recognition of Digital Assets Classified as Indefinite-Lived Intangibles
- If a digital asset is sold to a customer, then the transaction would be accounted for under ASC 606
- This is then included in “Revenue” in the profit and loss (P&L) when control of the digital asset has been transferred
- If the transaction isn’t with a customer, account for the sale in other income in accordance with ASC 610-20 on a net basis, outside of Revenue
6. Recognition of Digital Assets When a Third-Party Hosted Wallet is Used
- Determining which financial statements the digital asset should be recorded on when a wallet is used isn’t easy
- The answer depends on who has control of the digital assets—the depositor or the custodian
- Questions to consider in this control analysis include:
- Does title to the digital assets pass from the depositor to the custodian?
- When transferring digital assets out of the wallet, does the custodian have to transfer the original units or can they replace them with equivalent units?
- Would the digital assets be isolated from the custodian’s creditors in the event of bankruptcy?
- Can the depositor withdraw the digital assets from the custodian at any time and for any reason? Are there restrictions or limitations?
- If it’s determined that the custodian has control, the depositor would recognize an asset in its financial statements for the right to receive the digital assets from the custodian
- Similarly, the custodian would recognize the digital asset and a corresponding liability for its obligation to deliver the digital assets to the depositor in the future
- If the custodian has control, don’t forget to consider the derivatives guidance in ASC 815 for the depositor’s asset and the custodian’s liability
While industries have taken the new cryptocurrency advancements in stride, the accounting implications of these digital assets can be cumbersome and challenging. This non-authoritative guidance from the AICPA’s Digital Asset Working Group looks to clarify these ongoing uncertainties. Stay tuned for the Working Group’s upcoming white paper addressing some of the considerations relevant to auditing digital currencies.