Cryptocurrency GAAP – Any Clarity Yet?

So you now hold cryptocurrency in your business, perhaps because you’ve decided it is an advantageous medium of exchange, or you might hope to profit from an upswing in value. Clearly, your holdings are an asset of your business, but how should you display them on your balance sheet and at what amounts?

Well, the answer is not so clear. This is because no major accounting body worldwide has yet to figure it out. Many have begun studying this issue, and some trends are evolving, but no definitive requirements have emerged. For now, the companies that need to provide accounting recognition for these assets are mainly left to rule out what does not seem to work under existing guidance. Sort of a negative approach to getting at the answer.

Choices presented have generally included the following:

  • Cash or cash equivalents (which could include analogy to foreign currency)
  • Financial instrument
  • Inventory (or a commodity)
  • Intangible asset

Cash, cash equivalents and foreign currency do not seem to work, 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 accepted as a means of payment. Cryptocurrency is accepted as a transfer of value only if all parties to the exchange agree. Likewise, cash equivalents and foreign currency imply the ability to convert to local cash with near-term maturities that negate the risk of market fluctuations. The same rationale is present for financial instruments that rely on a contractual right to receive or exchange for cash.

Inventory or commodity treatment might meet the requirement of being held for sale in the business, but the US GAAP definition of inventory also includes the attribute of being a tangible asset. Is this a substantive distinction, given the presence of a new instrument trying to fit into existing accounting rules? Hard to say…

For now, the best choice appears to be 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.

Additional questions remain:

  • What about cryptocurrency obtained through mining? What, if any, costs incurred in the mining process, which can be considerable, can be capitalized as part of the intangible asset?
  • Should cryptocurrencies be carried at fair value, with periodic rises and falls recorded in earnings?

Standards-setters in the US and the international body (IASB), as well as individual country groups such as Japan and Australia, have all begun to study the matter, recognizing that the frequency and materiality of companies with cryptocurrency activity is rapidly increasing. The emerging trend appears to be 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.

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.