October 15, 2021

Financial Reporting: So, You Bought Some Crypto – How Do You Account for It?

Digital assets are becoming an increasingly popular investment for public companies.  But once you buy them, you need to account for them properly – and this FEI Daily blog says that involves fitting a square peg into a round hole:

Since there are no Generally Accepted Accounting Principles (GAAP) in the United States specific to digital assets, a company that invests in digital assets may end up applying accounting guidance that was not written with digital assets in mind. Many popular digital assets, including Bitcoin, Bitcoin Cash, Litecoin and Ethereum, inherently provide no contractual rights to cash or other assets to the holder. Unlike investment companies or broker-dealers that qualify for specialized accounting, operating companies transacting for the first time need to apply other standards to account for digital asset investments. Cryptocurrencies such as Bitcoin would typically be accounted for as indefinite-lived intangible assets under U.S. GAAP.

Often, rather than taking direct responsibility for securing private keys associated with digital assets, companies may involve a third party, such as an exchange or custodian. Involvements with third parties require an additional level of analysis to understand whether a company owns the digital assets (and they are just being custodied by the third party on the company’s behalf) or whether instead the company has a contractual receivable or other right from the third party that is tied to the value of a digital asset but does not represent current ownership of the digital asset itself. This analysis should involve an evaluation of the contractual agreement(s) between the company and the third party, as well as relevant laws, regulations and legal precedents. The form of the interest can impact the accounting.

Because of the complexities associated with these investments, the blog recommends companies pay close attention to the corporate governance, accounting and internal controls issues associated with them, and offers some specific suggestions on each of these topics.

Since the existing rules are so opaque, it isn’t surprising that the WSJ recently reported that companies are asking FASB to step in and provide additional clarity on how to account for digital assets.

John Jenkins