A growing trend in the nonprofit world, especially those nonprofits associated with the tech industry, is the acceptance of cryptocurrencies as charitable donations. Many individuals have benefited from the increased value of cryptocurrencies over the past few years as they become more widely accepted as a method of acquiring goods (by major companies like Overstock.com and Microsoft), and are now donating them directly to accepting nonprofits.
So if you are a nonprofit that has opened up a “wallet” on one of the many cryptocurrency exchanges to receive donations and now hold cryptocurrency, you may find yourself asking, what is the value of the donation and how should I display it on my financial statements?
Well, the answer is not so clear. This is because major accounting bodies worldwide have not yet come to a formal conclusion on the treatment, including the FASB for US GAAP. Many standard-setters have begun studying this issue, resulting in evolving trends, but no definitive requirements have emerged. For now, nonprofits (and other for-profit companies) that need to provide accounting recognition for these cryptocurrency assets are mainly left to rule out what does not seem to apply under existing guidance. Sort of a negative approach to getting at the answer.1
Cash, cash equivalents and foreign currency do not seem to apply, mainly because of existing definitions of “cash” in the accounting guidance. In order for cash to be cash, it must be accepted as legal tender, meaning that it must be widely accepted as a means of payment. Cryptocurrency is accepted as a transfer of value only if all parties to the exchange agree. 1
For now, the best classification of cryptocurrency appears to be as an intangible asset, because these assets, by definition, lack physical presence and clearly cryptocurrency is an asset. Additionally, because cryptocurrencies have no prescribed life, they would be considered an indefinite-lived intangible asset. Classification as an indefinite-lived intangible asset would mean that the asset is not amortized, but is tested for impairment when events justify. Because cryptocurrency markets are volatile, judging when this intangible asset is “more likely than not” to be impaired can involve considerable judgement. Additionally, once an impairment write-down is taken, the asset cannot be written back up for market recoveries. So this model is not perfect either. 1 (For additional information on clarity regarding cryptocurrency, see: Cryptocurrency GAAP – Any Clarity Yet?)
As for the initial recognition at the time of the donation, the existing guidance related to the donation of non-cash items such as property or investments should apply. The donation should be recorded at its fair market value at the date of donation, which can be obtained from the exchange used to facilitate the transfer of the cryptocurrency. Not all exchanges will have the same value, so it is important to be consistent in the exchange used. After the initial recognition, you will follow the applicable guidance described above.
Given this guidance, you can envision a situation where an organization has an amount recorded on the financial statements that does not reflect the current fair value due to significant fluctuations in the market, like we saw in the cryptocurrency market at the end of 2017. This is an opportunity to use the footnotes as a way to be transparent to the reader of the financial statements, and disclose the organization’s cryptocurrency holdings based on current market values.
Standards-setters have all begun to study the matter, recognizing that the frequency and materiality of cryptocurrency activity is rapidly increasing. The emerging trend appears to go with some form of intangible asset accounting, but certainly modifications will have to be made to address the special characteristics of cryptocurrency assets. 1
The best we can do right now is say “stay tuned” for definitive guidance. For now, for most situations, it seems the “indefinite-lived intangible assets” guidance is most supportable, though certainly not the only position to take. 1
A few final cautionary tales to keep in mind when deciding whether or not your organization should accept cryptocurrencies:
- Market volatility – the cryptocurrency market has seen more ups-and-downs than a roller-coaster at Six Flags. This volatility should be addressed at the highest levels of the organization to determine whether the organization wants to sell all of the holdings immediately upon donation, or hold on to the cryptocurrency for use in the future.
- Cash conversion – not all cryptocurrencies are able to be directly converted to cash. And those that are (such as Bitcoin), may not be able to be converted immediately upon request. As noted earlier, these are not considered to be legal tender and therefore are considered transfers of assets, which means you need two parties to accept the transfer. Certain exchanges may limit the amount you can exchange which can lead to organizations holding cryptocurrency longer than desired, which adds a risk of market decline.
- Traditional banking relationships – certain banks have identified cryptocurrency transactions as having higher risk, which means they may not be willing to accept transfers of cash from a cryptocurrency exchange. If your organization is going to accept cryptocurrency donations, it might be worth reaching out to your bank to inform them of your intentions and to verify they are comfortable accepting these types of transfers.
If your nonprofit organization has any additional questions about accepting cryptocurrencies as charitable donations, please reach out to our Nonprofit Group.
1 https://www.aslcpa.com/tech-blog/cryptocurrency-gaap/?post_type=tech-blog