Cryptoassets: Accounting for an Emerging Asset Class

A cryptocurrency (or “crypto”) is a digital currency that can be used to buy goods and services, but uses an online ledger with strong cryptography to secure online transactions. Much of the interest in these unregulated currencies is to trade for profit, with speculators at times driving prices skyward.

The growth of cryptoassets has made it incredibly challenging for regulators worldwide to standardize and issue authoritative guidance. Professional accounting standards setting bodies, including FASB and the IASB, are certainly no exception. Accountants with a deep knowledge of cryptoassets and blockchain technology are already increasingly in demand, as an intricate understanding of both the technology and accounting standards is required to provide appropriate guidance.

As the global economic and regulatory landscape has evolved, new categories of cryptoassets have emerged. Historically, all cryptoassets have been commonly referred to as cryptocurrencies, which can be misleading, as not all seek to function as a form of payment. Various classification frameworks are being published, and some of the most common other categories include utility tokens, which are intended to provide access to an application or service by means of a blockchain-based infrastructure; security-or asset-backed tokens, which function like stocks, bonds, and other traditional securities; and cryptocollectibles, which are cryptographically unique and limited in quantity.

As of yet, no specific guidance for cryptocurrencies has been issued under either U.S. GAAP or IFRS. How are companies accounting for cryptoassets, and are existing accounting standards sufficient and appropriate to be applied to this new emerging asset class? It is important to realize that the term “cryptoasset” is broad and, depending on the coin or token being evaluated, can vary widely in associated terms and conditions. In addition, terms and conditions may evolve and thus need to be reevaluated for appropriate accounting treatment. Other considerations include the purpose of the holder and the business model of the entity in question. The scope of this article is limited to cryptocurrencies or coins that function as a form of payment, such as Bitcoin, ZCash, and Litecoin.

Meeting the Definition of an Asset: It is important to consider whether cryptocurrencies do, in fact, meet the definition and recognition criteria of an asset. Under U.S. GAAP, an item that meets the definition of an asset is recognized when its cost or value can be measured reliably. Note that the probability of any future economic benefit associated with the item is not a recognition requirement under U.S. GAAP. Under IFRS, an asset is a “resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.”

Cash or Cash Equivalents: If it has been determined that the definition and recognition criteria of an asset have been met, the next question is one of classification. Is the asset cash or a cash equivalent? The significant volatility of cryptocurrencies, along with the fact that they are not considered legal tender (because they are not backed by a government nor widely accepted as a medium of exchange) would prevent holders from being able to “convert to a known amount of cash.” Thus, cryptocurrencies cannot be classified as cash or cash equivalents under U.S. GAAP or IFRS.
Financial Instruments: As defined under both IFRS and U.S. GAAP, financial instruments would seem like a natural classification for cryptocurrencies, allowing measurement at fair value and recording of changes in fair value in profit and loss. Cryptocurrencies, however, generally do not provide the holder with a contractual right to receive or exchange cash or a financial instrument and thus are not financial assets. That said, certain cryptocurrency futures (contracts to buy or sell cryptocurrencies in the future) that settle in cash could be considered derivatives and accounted for as financial instruments. In addition, there may be circumstances under which an entity holds cryptocurrency as an investment that falls within the scope of “investment company status” under U.S. GAAP, which would result in accounting for such investment, initially and subsequently, at fair value.

Inventory: Cryptocurrencies are often mined or purchased with the intention of reselling them, and thus it can be argued that they meet at least part of the definition of inventory under both U.S. GAAP and IFRS. As cryptocurrencies are not tangible in nature, however, they cannot meet the definition of inventory under U.S. GAAP. Because inventory under IFRS does not need to be tangible, a case can be made that cryptocurrencies may meet this definition; however, the volume of trading may not be sufficient to qualify as “held in the ordinary course of business.”

Intangible Assets: Being purely digital in nature, cryptocurrencies may meet the definition of “intangible assets” under both U.S. GAAP and IFRS. Cryptocurrencies such as Bitcoin generally have indefinite useful lives with no expiration date or limit on the period in which they can be exchanged for cash, goods, or services. Under U.S. GAAP, indefinite-lived intangibles are initially measured at cost and need to be tested for impairment annually. A decline below cost as quoted on a cryptocurrency exchange may be considered an event indicative of impairment. IFRS allows for intangible assets to be accounted for either at cost or revaluation at “fair value at the date of the revaluation less any subsequent … accumulated impairment losses.” The revaluation model can only be applied if the fair value can be determined by reference to an active market, defined as “a market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.”

What’s Next: Cryptocurrencies may meet the definition of an intangible asset, with potential circumstances for inventory or investment accounting by an investment company. The relevant accounting standards, however, were written before the birth of blockchain and cryptoassets and thus do not provide for their unique economic makeup. Careful consideration should therefore be given to the facts and circumstances of each cryptoasset case after consulting with advisors who understand their intricacies. The author implores FASB and the IASB to provide authoritative guidance that specifically addresses the recognition, measurement, presentation, and disclosure requirements for this dynamic new asset class.