Accounting for Cryptocurrency, Part I
Admit it – cryptocurrency is a strange concept; it didn’t even exist 15 years ago. But in just two years, the crypto market cap has reached unbelievable levels of up to $3 trillion (and crashing down to $1.7 trillion in January 2022). Tesla started (and stopped) accepting Bitcoin as payment for car purchases, investors pay millions for a Bored Apes NFT, the Los Angeles Lakers now play in the Crypto.com Arena, and some people ended up crazy rich buying Dogecoin just because it featured a picture of a famed Shiba Inu meme. Needless to say, the world of cryptocurrency is a weird place, and it’s high time we start making sense of the madness.
The accounting world is still catching up with the crypto boom. The FASB has not yet released any authoritative guidance around the US GAAP accounting for cryptocurrency, leaving a lot of uncharted territory while companies begin adding crypto to their balance sheets. So, what is the most reasonable accounting treatment for cryptocurrency as it stands now? While we wait for FASB guidance, the American Institute of Certified Public Accountants (AICPA) began compiling nonauthoritative initial thoughts on the accounting treatment for cryptocurrency, which can be seen in their “Accounting for and Auditing of Digital Assets” practice aid. This practice aid is available to the general public, but here’s what you really need to know:
What scope of guidance does cryptocurrency fall under?
This will be the key driver in its accounting treatment. The best method to figure out what crypto is, is first figuring out what it is not. AICPA provides the following guidance:
Crypto assets will not meet the definition of cash or cash equivalents when they are not considered legal tender and are not backed by sovereign governments. In addition, these crypto assets typically do not have a maturity date and have experienced significant price volatility.
Crypto assets will not be financial instruments or financial assets if they are not cash or an ownership interest in an entity and if they do not represent a contractual right to receive cash or another financial instrument.
Although these crypto assets may be held for sale in the ordinary course of business, they are not tangible assets and therefore may not meet the definition of inventory.
When considering the above, the consensus is that cryptocurrency may be best considered within the scope of intangible assets under ASC 350-30. With that evaluation, cryptocurrency should be recognized at its cost to obtain the asset. When purchasing crypto using cash, this would consist of the cash amount paid, and would include both the transaction-date purchase price and any related costs.
Is cryptocurrency considered a definite- or indefinite-lived intangible asset?
If there are no legal, regulatory, contractual, competitive, economic, or other factors that limit its useful life, then the intangible asset should be considered to have an indefinite life. For many forms of cryptocurrency, there are little to no such restrictions, so an evaluation of an indefinite-lived intangible asset is not uncommon. However, careful consideration should be made for any unusual terms for the specific crypto.
For crypto evaluated as an indefinite-lived intangible asset, they are not subject to amortization. Definite-lived crypto should be amortized over the most appropriate corresponding useful life.
Next week, we’ll explore when to consider crypto for impairment, how to derecognize (through sale or use), and what P&L gains or losses you can expect to come along with that.
In the meantime, have you seen any ways that cryptocurrency has been accounted for differently under US GAAP?
