Call me a crusty old Gen-X’er but this cryptocurrency and non-fungible token (NFT) investments never seemed so legit to me. But after several years of hearing about them, I’m ready to admit they are here to stay…at least I’m in front of the FASB who still has declined to provide any accounting guidance on these assets.
Bitcoin, Ether, and even Dogecoin are examples of cryptocurrencies, whereas NFTs provide proof of digital ownership over music, art, or other form of collectible. While both cryptocurrencies and NFTs are similar in that they utilize blockchain to prove ownership, NFTs are unique items of ownership with unique values (e.g. ownership of artist, Beeple’s Everydays digital collage); crypto coins, such as a bitcoin, are identical to other bitcoins and have the same value.
With popularity of these blockchain-based assets continuing to grow and leading to increased (and dare I say, more stable) valuations, they are starting to be held by companies. For example, Tesla holds a significant investment in bitcoin. And as a result, these things need to be accounted for in real U.S. GAAP financial statements…this is where this crusty Gen-X’er begins to get serious about these new digital holdings.
So, what exactly are these instruments from an accounting perspective? Not too long ago, we wrote a blog on accounting for cryptocurrency under IFRS, as this was an issue discussed by the IFRIC and addressed through an agenda decision. In other words, the IFRIC determined that the IFRS standards were sufficient to determine the proper accounting for these assets. The conclusion: either an intangible asset or inventory, depending on the entity’s purpose of holding it.
But what about U.S. GAAP? The FASB was also asked to address the topic of cryptocurrencies, but refused to take up the issue on its agenda, citing, "The board decided that it hadn't risen to the level of pervasiveness [where] it should be one of the priorities on our agenda.” Who knows how much longer this argument can be made?
When the FASB refused to address the issue, the AICPA took the initiative to issue a practice aid on the topic. The conclusion was similar to the IFRS conclusion, with the exception that U.S. GAAP does not allow for “intangible assets” to qualify as inventory, resulting in only accounting for these instruments as an indefinite-lived intangible asset.
In the aforementioned blog, we discuss why cryptocurrencies are not financial assets and are therefore relegated to intangible asset accounting. In this blog, I want to discuss why this may be a problem under U.S. GAAP and also why it might not be that big of a deal after all.
The problem with indefinite-lived intangible asset accounting:
As previously alluded to, cryptocurrencies and NFTs are extremely popular, largely due to social media hype and speculative investors. This leads to quite a bit of volatility in these assets (both increases and decreases). However, from an accounting perspective, indefinite-lived intangible assets under U.S. GAAP only capture negative volatility through impairment recognition. If the instrument either recovers in value or goes above its cost, ASC 350 does not allow for recognition of this increase! As a result, the financial statements will only capture the downside results from these assets, even though they are largely held as a form of currency or investment.
Why this might not be that big of a problem:
Why has the FASB largely ignored providing accounting guidance for these types of instruments? Because the entities that most commonly hold these types of instruments, hedge funds, ETFs, and other investment vehicles, are typically considered “investment companies” under ASC 946 and therefore require the preferred and logical accounting for these instruments: investments at fair value through earnings. We discussed this as well in one of our past blogs. As a result, the accounting for U.S. GAAP is largely in line with what we would expect it to be. The exception is for non-investment companies, such as Tesla and others, that are beginning to hold investments in these types of crypto-assets. For these types of companies, the FASB will need to act…otherwise, intangible asset accounting will be the only way to account for them!
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