Accounting for Cryptocurrency, Part II
Last week we began to demystify crypto. We talked about the US GAAP scope of guidance that it is believed to fall under, and how to recognize and hold it on your balance sheet. Now let’s tackle when to consider impairment, and how to derecognize it through use, sale, or exchange.
Let’s start with Impairment.
Since it falls under intangible asset guidance, crypto must also be evaluated for potential impairment. Impairment may be necessary if a decline in fair value is based on relevant events and circumstances, including the following under ASC 350-30-35-18B (see related codification paragraph for further detail):
Legal, regulatory, contractual, political, business, or other factors
Industry and market consideration
Macroeconomic conditions
There is no clear guidance on what does or does not constitute an impairment event for cryptocurrency so far; this will be a subjective assessment. In my opinion, most crypto experiences significant price volatility (there can be swings of over 10% in a day), and impairment is not required for general volatility. However, when that market decline is based on key events or circumstances like the factors above, then impairment should be considered. There are no upward adjustments or reversals of impairment on crypto if its fair value increases while being held by a company.
Assuming no impairment, the accounting treatment for holding crypto is relatively simple. The carrying value of indefinite-lived cryptocurrency will remain at its cost until it is used or sold. For definite-lived crypto, it will be carried at its amortized cost.
Derecognizing Crypto
There will come a time for a company to part with its crypto, either by sale (for cash or other assets) or use for other purposes (such as exchanging for another digital asset such as an NFT or other crypto). The original cost of the crypto being exchanged/sold should be derecognized, and a Profit and Loss (P&L) gain or loss will likely occur based on the fair value of what is received as consideration in exchange:
If crypto is being sold for cash, a P&L gain/loss is recognized as the difference between the original cost and the cash received.
If crypto is being sold for other non-crypto assets, a P&L gain/loss is recognized as the difference between the original cost and the fair value of what is received. If the fair value of what is being received is not readily available, then the transaction-date price of the sold crypto (based on a recognized exchange such as Coinbase) should be used.
If crypto is exchanged for an NFT, a P&L gain/loss is recognized as the difference between the original cost and the fair value of the NFT received. If a contractual amount for the NFT is not readily available, then the transaction-date price of the sold crypto (based on a recognized exchange such as Coinbase) should be used.
If crypto is exchanged for other crypto assets, a P&L gain/loss is recognized as the difference between the original cost and the transaction-date price of the crypto received (based on a recognized exchange such as Coinbase). If the transaction date price of the received crypto is not readily available, then the transaction-date price of the sold crypto should be used.
An important matter to keep in mind is that a company will need to track its transactions of cryptocurrency that is purchased to ensure the correct cost amount is known and used for subsequent impairment or sale/exchange. Exchanges such as Coinbase should be utilized for the details of each transaction.
Again, cryptocurrency is weird. The structure of crypto will likely evolve as it faces regulatory pressure, and some coins that we are most familiar with now may not even exist in 12 months. In the meantime, we can account for these strange assets using the information we currently have and by engaging accounting experts that can assist in navigating the available US GAAP guidance.
Is the above how you have seen cryptocurrency sales/usage accounted for? Have you seen it done differently?
