Accounting for Crypto Assets (#369)
/Accounting for Crypto Assets
Until recently, the rule under Generally Accepted Accounting Principles was that crypto assets were to be classified as intangible assets. This means that when you purchase a crypto currency, you record it at the purchase cost. After the acquisition date, you could not increase the recorded value of the asset, even if the market value went up. Instead, all you could do was record an impairment to the asset if its market value went down. So essentially, it was a one-way ratcheting mechanism that resulted in the lowest possible cost being recorded.
The original reason for this treatment as an intangible asset was that crypto currency was considered to have such a volatile price that it couldn’t be considered a form of cash. And on top of that, it wasn’t issued by a sovereign government. So it couldn’t possibly be considered a form of cash – or, could it?
The problem is that crypto currencies do have value, and – depending on the currency – that value may go up by quite a lot. This resulted in a disconnect, where a business might be recording a crypto asset value on its balance sheet that was far, far lower than its market value.
So, as you might expect, the Financial Accounting Standards Board got a lot of complaints – about 500 of them – about the official line on how to account for and disclose crypto assets. This resulted in a change in the accounting that was announced at the end of 2023. I haven’t brought it up until now, because it’s set to go into effect in about two weeks.
Accounting for Crypto Assets at Fair Value
The new accounting is to account for crypto assets at their fair value, with any changes being recognized right away in net income. What this does is match the reported value of your crypto asset holdings to their market value at the end of each reporting period. If the market value has declined from the previous reporting period, then you recognize a loss. Or, if the market value has increased, then you recognize a gain.
This is a definite improvement in the overall accounting, since now you can really see the current value of someone’s crypto assets. An additional change is that crypto assets have to be listed separately on the balance sheet from all other intangible assets. This makes sense, because the other intangibles are measured differently, with a cost basis that’s subject to impairment testing.
If anything, it looks as though crypto assets are being accounted for like investments in equity securities. That being the case, I have to wonder why crypto assets are still being reported adjacent to intangible assets, when they really ought to be stated further up in the balance sheet, as part of investments. And someday, maybe that will happen.
Crypto Asset Disclosures
Which brings us to the required disclosures. A good one is a required breakdown of your crypto asset holdings. You have to disclose the name, cost basis, fair value, and number of units for each significant crypto asset holding, plus the same information in aggregate for any crypto assets that are not individually significant. This is really useful. Let’s say you’re a lender and you want to evaluate the riskiness of someone’s crypto holdings – this disclosure provides the detail that you need.
There are also some less useful disclosures. For example, if you sold any of these assets, you have to disclose the difference between the cost basis and the sale price. Not sure I see the point.
There’s also an annual roll forward requirement, where you have to present a table that shows crypto asset beginning balances, and subsequent purchases, subsequent sales, and gains or losses. I’m not seeing a good use case for that one, either. Still, overall, this is a significant improvement in the accounting for crypto assets.