Cryptocurrencies have been gaining more acceptance all over the world. For the past years, well-known cryptocurrencies such as Bitcoin and Ethereum have been stealing the news headlines to become the hottest talk of the town. With the continuous growth and evolving business environment, companies are starting to hold these digital assets with differing views on how to account for it. True enough, financial statements users and preparers have been consistently demanding a standardized accounting* for cryptocurrencies for quite some time now.
To date, the Financial Accounting* Standards Board (“FASB”) has received three agenda requests related to the accounting* for digital currencies. These agenda requests are as follows:
June 8, 2017 Agenda Request. This agenda request stated that on the basis of the existing standards, digital currencies would be accounted for as indefinite-lived intangible assets. However, the agenda request suggested that FASB must create a new guidance to account for digital currencies and that these will be measured at fair value with changes in value recognized in earnings.
May 30, 2019 Agenda Request. This agenda request stated that some practitioners were concerned that accounting* for cryptocurrency as indefinite-lived intangible assets does not show the most relevant information of holding cryptocurrencies. The agenda request concluded that the characteristics and risks of cryptocurrencies are similar to those of foreign currency.
October 16, 2019 Agenda Request. This agenda request did not suggest a preferred method for accounting* for cryptocurrencies but noted that the current practice of classifying cryptocurrency as an indefinite-lived intangible asset may not be appropriate.
In 2019, the American Institute of Certified Public Accountants (“AICPA”) took the initiative to issue a practice aid on the matter, entitled “Accounting* for and auditing of digital assets”. The conclusion stated that the characteristics of cryptocurrencies meet the definition of indefinite-lived intangible assets and would generally be accounted for under Accounting* Standards Codification (“ASC”) 350, Intangibles—Goodwill and Other. In addition, it emphasized that cryptocurrencies would not meet the definition of other asset classes within generally accepted accounting* principles (“GAAP”), as described in the following examples:
- Cryptocurrencies will not meet the definition of cash and cash equivalents as they are not considered as legal tender and are not backed by sovereign governments.
- Cryptocurrencies will not be financial assets as they do not represent a contractual right to receive cash or another financial instrument.
- Cryptocurrencies, though 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.
The practice aid also discussed how a company classified as an investment company under ASC 946, Financial Services—Investment Companies would account for investments in digital assets. The conclusion stated that investment companies should determine whether its holdings of cryptocurrencies represent a debt security, equity security, or another investment and apply the guidance in ASC 946-320 for investments in debt and equity securities or ASC 946-325 for other investments. Irrespective of the type of investment, ASC 946 requires an investment company to initially measure its investments at their transaction price, inclusive of commissions and other charges that are part of the purchase transaction. Subsequently, investment companies should measure investments in digital assets at fair value through earnings.
In terms of taxation, the Internal Revenue Service issued a notice in 2014 explaining that cryptocurrency as a form of virtual currency is treated as property for Federal income tax purposes. Accordingly, the tax treatment of selling cryptocurrencies is similar to that of selling stocks and equities, hence the tax treatment based on holding periods will apply. In addition, any losses from cryptocurrency sales can be used to offset non-cryptocurrency-related capital gains in a given tax year.
The Issue with Intangible Asset Accounting*
From an accounting* perspective, accounting* for cryptocurrency as indefinite-lived intangible assets only recognizes negative volatility through impairment. Note that under ASC 350, an indefinite-lived intangible asset is not subject to amortization but should be tested for impairment annually or more frequently if events or changes in circumstances indicate it is more likely than not that the asset is impaired and any subsequent reversal of previously recorded impairment losses is prohibited. As a result, a cost and impairment model for intangible assets does not faithfully represent the economic nature of digital currencies as these currencies generally have actively traded markets. Consequently, financial statements only capture decrease in fair value changes.
In a board meeting in October 2020, FASB still decided not to add a project on accounting* for digital currencies to its agenda. Meanwhile, Richard R. Jones, FASB Chair, in a virtual interview last March 2021 with CFO.com, mentioned that “The board decided that it hadn’t risen to the level of pervasiveness [where] it should be one of the priorities in our agenda”. He added that it is more important for a potential standard setting to be more comprehensive and deal with other non-financial assets that are typically carried at historical cost even though they are traded in active markets, such as precious metals and certain commodities such as oil.
Generally, ASC 946 is generally in line with the logical accounting* for cryptocurrencies but this only applies to investment companies. The challenge now is on the non-investment companies such as Tesla, an electric vehicle manufacturer, that currently joined the ranks of companies holding Bitcoin. Tesla, in its 2020 10-K filing, disclosed that it accounts for its digital assets as indefinite-lived intangible assets in accordance with ASC 350 and highlighted that it could make no upward revisions for any market increases until a sale which may adversely affect its operating results in any period in which impairment occurs.
Current accounting* standards were written prior to the birth of cryptocurrencies and thus, do not align with the reality. This may lead to understatement and prohibits companies from showing the true value of its cryptocurrencies on its financial statements. Unfortunately, FASB will not make the necessary changes anytime soon. Hence, companies are advised to monitor emerging accounting* and tax challenges of holding cryptocurrencies.
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About the Author
Arlie Basilio is a Senior Supervisor of the Technical Accounting Group of Scrubbed. He assists companies in preparing technical memoranda and performs extensive review of US GAAP financial statements (i.e., 10-Q and 10-K reports), note disclosures, and account reconciliations. Prior to joining Scrubbed, he has more than four years of professional experience with Ernst and Young (EY) Philippines handling financial statement audits for private companies
Jezaniah Castro has extensive experience in preparation and filing of federal, state and local income tax returns for businesses and high net-worth individuals and other business-related filings, including sales and use tax in compliance with applicable US federal and state tax laws and regulations. She has also dealt with IRS and State tax notices, tax legislation, or audit workpapers in advocating taxpayer’s position to the taxing authorities.
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