The American Institute of Certified Public Accountants (AICPA) recently updated its Practice Aid, Accounting for and Auditing of Digital Assets, to include new non-authoritative guidance discussing investment companies and broker-dealers holding crypto assets, fair value measurements, and accounting for stablecoins.
Originally issued in December 2019, the Practice Aid is a framework for financial statement preparers and auditors on accounting for and auditing digital assets under Generally Accepted Accounting Principles (GAAP) and Generally Accepted Auditing Standards (GAAS). The new material (published in October 2020) is additive to the documents previously issued in December 2019 and July 2020.
Digital assets are broadly defined in the guidance to include digital records made using cryptography for verification and security purposes on a distributed ledger (i.e. blockchain). The digital assets ecosystem is evolving rapidly. As investment companies seek to provide these types of investments to their customers, they must understand the unique risks and accounting challenges.
The AICPA takes an extensive dive into these matters, so we’ve looked at all of the important updates concerning investment companies and summarized the key points presented in their answers.
Fortunately the guide clarified a few items that we all hoped would be true. First, participation in digital asset activities, including mining, doesn’t prohibit a company from qualifying as an investment company. Additionally, if you’re an investment company, you should account for digital asset investments at fair value (just as you account for all other investments).
Concerns for Fair Valuing Digital Assets
Fair value should be determined based on the value in the principal market. The guide defines the principal market as the market with the greatest volume and level of activity that the entity has access to. It’s presumed that the principal market is the market the company typically transacts in. But if the company determines there’s no principal market, the company should move to the most advantageous market concept for valuing the asset.
Fair Value Measurements
Does this mean active markets are Level 1 assets within the fair market value hierarchy? The simple answer is yes. If you have an active market with a quoted price, that meets the definition of a Level 1 asset. As these are Level 1 valuations, adjustments shouldn’t be made to the price, regardless of the position that the investments company holds relative to the market size. If the principal market doesn’t have orderly transactions, that’s an exception to the Level 1 asset determination. The guide goes into further detail on this determination.
The guide also details when a daily price should be determined if these markets continuously operate—allowing investment companies to elect a cut-off time for determining fair value. We believe that the most common cut-off time will be the end of a business day or local market close times.
Due to the complicated nuances of digital assets, the AICPA’s guidance outlines the detailed steps needed to account for investments in this asset class. Investment companies stepping into this arena must be agile in their handling of the varying obstacles faced in the crypto industry. The additional guidance seeks to equip these companies with the information and strategies needed to accurately and appropriately account for digital assets.
The updated Practice Aid also covers topics (such as recognition, measurement, and presentation of digital assets specific to broker-dealers) that are beyond the scope of this piece, and may be difficult to comprehend without expert insight. Reaching out to a third-party versed in the nuances of the guidance may help your company navigate digital asset concerns.