While the global standard-setters of financial reporting are groping with the daunting task of setting rules for accounting of crypto assets, the Digital Assets Working Group of the AICPA (American Institute of Certified Public Accountants) has released guidelines for accounting and reporting of digital assets such as cryptocurrencies. Although non-authoritative, this practice aid provides a great deal of help to the preparers of financial statements in the absence of any other authoritative guideline.
Crypto asset is not...
Crypto assets do not meet the definition of cash or cash equivalents as they are not considered legal tender. They are not backed by sovereign governments and have traditionally experienced significant price volatility. Although these crypto assets may be held for sale in the ordinary course of business, they are not tangible and they may not meet the definition of inventory. Crypto assets are not financial instruments as they are not cash or an ownership interest in an entity and do not represent a contractual right to receive cash or another financial instrument.
Crypto asset is...
The term crypto asset is specific to the type of digital assets that function as a medium of exchange and must have all the characteristics, such as, they are not issued by a jurisdictional authority, 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 nor the Securities Exchange Act of 1934 of the USA. For the purposes of these guidelines, digital assets are defined broadly as digital records that are made using cryptography for verification and security purposes, on a distributed ledger, referred to as a blockchain. The distributed ledger keeps a record of all transactions on a blockchain network. Digital assets, as defined herein, may be characterised by their ability to be used for a variety of purposes, including as a medium of exchange, as a representation to provide or access goods or services, or as a financing vehicle, such as a security, among other uses.
Recognition and measurement
Crypto assets will be recognised as intangible assets and the useful life of these assets should be considered indefinite. The term indefinite does not mean infinite or indeterminate. The useful life of an intangible asset is indefinite if that life extends beyond the foreseeable horizon i.e., there is no foreseeable limit on the period of time over which the asset is expected to contribute to the cashflows of the reporting entity. If there is no inherent limit imposed on the useful life of the crypto asset to the entity, the crypto asset would be classified as an indefinite-lived intangible asset.
As intangible assets, these crypto assets purchased for cash would initially be measured at cost. The entity would measure the noncash consideration, if any, of the cost at its estimated fair value on the date of purchase.
Subsequent accounting
An indefinite-lived intangible asset is initially measured at cost and is not subject to amortization. Rather, it should be tested for impairment annually. Likewise, all digital and crypto assets are tested for impairment subsequently. Judgment may be required to identify whether an event has occurred that would require performing an impairment assessment. When an identical digital asset is bought and sold at a price below the entity’s current carrying value, this will often serve as an indicator that impairment has more likely than not occurred. If the entity concludes that the fair value of the digital asset is less than its carrying amount, an impairment loss should be recorded in the profit or loss.
An important point to note in this guideline is this, once an impairment loss is recognised for a digital asset, subsequent reversal of previously recorded impairment loss is prohibited. This provision applies even if the fair value of the digital asset has increased.
Sale and derecognition of digital assets
When digital assets are sold, entities should track the cost (or subsequent carrying value) of units of digital assets they obtain at different times and use this value for each unit of digital assets upon derecognition when they sell or exchange. Digital assets typically represent fungible units that can be subdivided into smaller fractional units. It may not be possible to identify which specific units of digital assets were sold or transferred in certain cases. An entity may apply the guidance in this circumstance by developing a reasonable and rational methodology for identifying which digital assets were sold and applying it consistently. For example, one reasonable and rational approach could be using the first-in, first-out method.
Third-party wallet service
Digital assets like any other asset, should be recognised on the financial statements of the entity that controls the asset. The fact that crypto assets are held or stored in wallets hosted by third parties, raises an important question as to the control of that asset. Determining which entity – the depositor or the custodian – has control of the digital asset should be based on the specific facts and circumstances of the agreement between them and the applicable laws and regulations. In this regard, a legal analysis may be necessary to evaluate certain aspects of the agreement, including legal ownership.
This paper also covers other areas in the context of digital assets like the investment entity, Stablecoin, derivatives, embedded derivatives, etc. This practice aid is based on existing professional literature and the experience of members of the Digital Assets Working Group and represents the non-authoritative views of the staff of AICPA.
James Ravi, Director, Crowe Oman.
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