Companies and executives are more and more realizing there’s a complete new degree of complexity mendacity simply beneath crypto’s binary-coded floor, primarily the way to account for it, how the accounting requirements apply, and what all of it means for the accounting group. Since digital property and cryptocurrencies aren’t going anyplace, any firm eager about dipping its toe into the crypto waters wants to grasp what it’s getting itself into.
FASB and digital property
Steerage stays murky for a CFO or CAO on the lookout for solutions on digital property 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 the way to classify these property on the steadiness sheet. It may well’t be money, money equivalents or a attainable sort of overseas foreign money as a result of it have to be accepted as authorized tender and backed by a authorities. Likewise, money equivalents should characterize investments which might be readily convertible to money or have a close to maturity that ends in insignificant danger 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 go away us? Most firms are classifying digital property as a sort of intangible asset. Granted, this nonetheless isn’t a fantastic match, but it surely’s the very best we now have below the present requirements because it supplies the broadest definition. Particularly, digital property:
- Lack bodily substance, and
- Are indefinite-lived as they haven’t any prescribed life.
This implies firms initially document digital property at their acquisition price and, thus, topic them to annual and trigger-based impairment exams. For sure, this opens up a wholly new can of economic accounting worms.
Given the fixed volatility of those digital property — and the truth that the impairment mannequin for indefinite-lived intangible property permits a write-down in worth however no write-up for will increase — the accounting outcomes will be laborious for some to wrap their head round.
Even a single day’s vital decline within the worth of a digital asset might warrant a trigger-based impairment check and a attainable impairment cost. It’s because in contrast to some monetary devices, the impairment framework for intangible property shouldn’t be an other-than-temporary-impairment mannequin.
Performing impairment exams on digital property
For impairment exams, it’s simply following relevant steering in ASC 350. On this case, which means 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 recuperate any worth for earlier impairment expenses taken below 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 circumstances the place the sale worth exceeds the adjusted carrying worth.
What’s forward for digital asset accounting
You’re not mistaken for pondering digital asset accounting has a distinctly wild west really feel to it proper now. Due to this fact, it’s protected to imagine regulators will standardize the relevant steering in some unspecified time in the future, significantly as these property develop in reputation. Possibly 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 a further wrinkle, since some firms are accepting digital currencies in alternate for items and companies, that brings the ASC 606 rev rec framework into the fold. On this occasion, the crypto can be a non-cash consideration from the shopper 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 property. Sure, it’s one other monetary asset class that means that you can additional diversify and probably 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 observe help on the subject, Accounting for and Auditing of Digital Belongings. There, you’ll discover further insights and useful use circumstances which may shed a useful mild in your particular accounting problem.
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 seems prefer it’s going to proceed like that for the foreseeable future.