Abstract: Cryptocurrency is becoming increasingly common as a method of payment (as well as an investment). Although the IRS has issued guidance on reporting these transactions for federal income tax purposes, there are currently no accounting standards that specifically address the economics and nuanced nature of digital assets. This article discusses feedback from investors and FASB members on whether a cryptocurrency project should be added to the FASB’s five-year agenda.
Cryptocurrency is becoming increasingly common as a method of payment (as well as an investment). Many companies — including AT&T, Microsoft, Expedia and Overstock — now accept Bitcoin from customers. Although the IRS has issued guidance on reporting these transactions for federal income tax purposes, there are currently no accounting standards that specifically address the economics and nuanced nature of digital assets. The Financial Accounting Standards Board (FASB) has been debating whether to add this topic to its agenda.
Defining digital assets
Digital assets are exchanged on a blockchain, a digital decentralized ledger that’s real-time and paperless. They’re verified and secured with cryptographic keys, and they can serve various purposes. In addition to providing a means of exchange, digital assets may be used as:
- Compensation,
- Financing,
- A security, or
- A right to receive, provide, or access a good or service.
According to the AICPA’s Blockchain Universal Glossary, cryptocurrencies are “a type of digital asset that functions as a medium of exchange and has all the following characteristics: They are not issued by a jurisdictional authority (for example, a sovereign government). They do not give rise to a contract between the holder and another party. They are not considered a security under the Securities Act of 1933 or the Securities Exchange Act of 1934.” Examples of cryptocurrencies include Bitcoin, bitcoin cash and Ethereum.
Evaluating existing guidance
Cryptocurrency may convert readily to cash or other forms of liquidity or be exchanged for fiat currencies, such as U.S. dollars or euros. But it doesn’t meet the accounting definition of cash or represent a contractual right to receive cash or another financial instrument. Cryptocurrency also can’t be classified and accounted for as inventory even when it’s used as a medium of exchange in an entity’s ordinary course of business. This leads to the classification and accounting cryptocurrency as an indefinite-lived intangible asset, under Accounting Standards Codification Topic 350-30, Intangibles — Goodwill and Other — General Intangibles Other Than Goodwill.
Under Topic 350, cryptocurrencies must initially be recorded at cost and subsequently tested for impairment. If the asset’s fair value is less than the recorded carrying value, a permanent impairment loss would have to be recognized. Reversals of a previously recognized impairment loss are strictly prohibited. This accounting treatment is controversial and counterintuitive, because cryptocurrencies typically experience significant price volatility, which could lead to unexpected results.
To remedy potential concerns, the FASB might consider cryptocurrency as a new and separate asset category or as a specific class of intangible asset, which is the case with goodwill. When recognizing and measuring these assets, the FASB is considering 1) an accounting model that allows them to be accounted for at fair value, or 2) amending Topic 350 to allow a limited exception for impairment reversals only to reflect subsequent expected recoveries up to the asset’s originally recorded cost.
Soliciting stakeholder feedback
In June 2021, the FASB issued Invitation-to-Comment No. 2021-004, Agenda Consultation, to solicit broad public input about which topics to add to its five-year agenda. Investors didn’t rank cryptocurrency in the top five topics that the FASB should prioritize in its next technical agenda. Instead, the hottest topic was disaggregation of financial information, followed by the presentation of the statement of cash flows and environmental, social and governance reporting.
“Digital came in around sixth,” said FASB member Christine Botosan. “So there’s certainly a lot of energy around that topic.”
Given the increasing prevalence of cryptocurrency transactions, the FASB plans to get ahead of the game. Many who want to add a cryptocurrency project to the FASB’s agenda are concerned that the current guidance misrepresents the economic substance of those assets.
Stay tuned
FASB members see cryptocurrency becoming a more significant issue over the next five years, and they’re closely monitoring and analyzing the issue. Contact us for the latest developments.
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