Companies and executives are more and more realizing there’s a complete new stage of complexity mendacity simply beneath crypto’s binary-coded floor, primarily the right way to account for it, how the accounting requirements apply, and what all of it means for the accounting staff. Since digital belongings and cryptocurrencies aren’t going wherever, any firm fascinated by dipping its toe into the crypto waters wants to grasp what it’s getting itself into.
FASB and digital belongings
Steering stays murky for a CFO or CAO searching for solutions on digital belongings and cryptocurrency accounting as a result of, to place it bluntly, there actually isn’t a lot steerage particular to them. The dialog begins by figuring out precisely the right way to classify these belongings on the stability sheet. It may’t be money, money equivalents or a potential kind of international forex 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 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 go away us? Most corporations are classifying digital belongings as a kind of intangible asset. Granted, this nonetheless isn’t an important match, however it’s the perfect we’ve got below the present requirements because it offers the broadest definition. Particularly, digital belongings:
- Lack bodily substance, and
- Are indefinite-lived as they haven’t any prescribed life.
This implies corporations initially file digital belongings at their acquisition price and, thus, topic them to annual and trigger-based impairment exams. Evidently, 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 may be onerous 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 take a look at and a potential impairment cost. It is because not like some monetary devices, the impairment framework for intangible belongings just isn’t an other-than-temporary-impairment mannequin.
Performing impairment exams on digital belongings
For impairment exams, it’s simply following relevant steerage in ASC 350. On this case, meaning trying on the asset’s truthful worth and evaluating it to its carrying worth. If the truthful 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 costs 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 instances the place the sale worth exceeds the adjusted carrying worth.
What’s forward for digital asset accounting
You’re not incorrect for pondering digital asset accounting has a distinctly wild west really feel to it proper now. Due to this fact, it’s secure to imagine regulators will standardize the relevant steerage in some unspecified time in the future, notably as these belongings develop in reputation. Perhaps that can 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 corporations 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 could be a non-cash consideration from the shopper and accounted for as such.
Proceed with warning
In the end, an organization should weigh the nice versus the unhealthy when taking a look at digital or crypto belongings. Sure, it’s one other monetary asset class that permits you to additional diversify and presumably acknowledge some critical features.
Nevertheless, the accounting may 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 follow help on the subject, Accounting for and Auditing of Digital Property. There, you’ll discover extra insights and useful use instances which may shed a worthwhile gentle in your particular accounting difficulty.
All issues thought of, there’s a good quantity of economic report MacGyvering when accounting for issues like cryptocurrencies and digital tokens on the stability sheet. And it seems to be prefer it’s going to proceed like that for the foreseeable future.