Companies and executives are more and more realizing there’s an entire new stage of complexity mendacity simply beneath crypto’s binary-coded floor, primarily easy methods to account for it, how the accounting requirements apply, and what all of it means for the accounting workforce. Since digital belongings and cryptocurrencies aren’t going wherever, any firm fascinated with dipping its toe into the crypto waters wants to know what it’s getting itself into.
FASB and digital belongings
Steering stays murky for a CFO or CAO on the lookout for solutions on digital belongings and cryptocurrency accounting as a result of, to place it bluntly, there actually isn’t a lot steering particular to them. The dialog begins by figuring out precisely easy methods to classify these belongings on the steadiness sheet. It might probably’t be money, money equivalents or a attainable kind of overseas forex as a result of it should be accepted as authorized tender and backed by a authorities. Likewise, money equivalents should characterize investments which are readily convertible to money or have a close to maturity that leads to insignificant threat to the worth.
Sadly, accounting for them as an funding or monetary instrument is one other swing and a miss. So the place does that depart us? Most corporations are classifying digital belongings as a sort of intangible asset. Granted, this nonetheless isn’t an amazing match, but it surely’s the most effective we have now underneath the present requirements because it gives the broadest definition. Particularly, digital belongings:
- Lack bodily substance, and
- Are indefinite-lived as they haven’t any prescribed life.
This implies corporations initially document digital belongings at their acquisition value and, thus, topic them to annual and trigger-based impairment checks. For sure, this opens up a wholly new can of economic accounting worms.
Given the fixed volatility of those digital belongings — and the truth that the impairment mannequin for indefinite-lived intangible belongings permits a write-down in worth however no write-up for will increase — the accounting outcomes will be arduous for some to wrap their head round.
Even a single day’s vital decline within the worth of a digital asset may warrant a trigger-based impairment take a look at and a attainable impairment cost. It is because in contrast to some monetary devices, the impairment framework for intangible belongings isn’t an other-than-temporary-impairment mannequin.
Performing impairment checks on digital belongings
For impairment checks, it’s simply following relevant steering in ASC 350. On this case, meaning trying on the asset’s honest worth and evaluating it to its carrying worth. If the honest worth is much less, then it’s important to write it down and take an impairment cost.
However as we talked about earlier, you can not get better any worth for earlier impairment fees taken underneath present U.S. GAAP. As a substitute, you’ll solely acknowledge any upside as a acquire upon the sale of the intangible asset, and that’s simply in instances the place the sale worth exceeds the adjusted carrying worth.
What’s forward for digital asset accounting
You’re not incorrect for considering digital asset accounting has a distinctly wild west really feel to it proper now. Subsequently, it’s secure to imagine regulators will standardize the relevant steering in some unspecified time in the future, notably as these belongings develop in reputation. Perhaps that may entail transferring to a good worth mannequin, a carve-out definition of a monetary instrument, and even a wholly new asset class.
Additionally, as an extra wrinkle, since some corporations are accepting digital currencies in trade for items and providers, that brings the ASC 606 rev rec framework into the fold. On this occasion, the crypto could be a non-cash consideration from the client and accounted for as such.
Proceed with warning
Finally, an organization should weigh the great versus the dangerous when taking a look at digital or crypto belongings. Sure, it’s one other monetary asset class that lets you additional diversify and presumably acknowledge some severe positive aspects.
Nonetheless, the accounting will be messy, and the numerous volatility solely amplifies the mess on the monetary statements. Our recommendation is to proceed with warning and seek the advice of the AICPA apply help on the subject, Accounting for and Auditing of Digital Property. There, you’ll discover extra insights and useful use instances that may shed a useful gentle in your particular accounting situation.
All issues thought-about, there’s a good quantity of economic report MacGyvering when accounting for issues like cryptocurrencies and digital tokens on the steadiness sheet. And it appears to be like prefer it’s going to proceed like that for the foreseeable future.
