Expert Series
Sep 23, 2022

Cryptocurrency as an Intangible Asset

One of the top questions amongst business owners is “How are digital assets treated in the financial statements?”

Drew Mowrey

Drew Mowrey is a CFA Charterholder and former e-commerce entrepreneur based in New York city. As a former controller for Kruze consulting, Drew has worked on all aspects of accounting and tax for venture backed startups in cybersecurity, fintech, and cryptocurrency.

Adoption of cryptocurrency continues to accelerate among businesses - whether in the course of daily operations or as an investment opportunity. As with any financial innovation - one of the top questions amongst business owners is “How are digital assets treated in the financial statements?” 

In US GAAP, or generally accepted accounting principles, there are currently no accounting standards that directly address cryptocurrencies. However, the AICPA has released non-authoritative guidance on how to account and audit digital assets under GAAP in order to answer common questions from finance professionals.

While it can feel like trying to fit a square peg into a round hole - we must look at existing guidelines to discover where digital assets fit in.

Determining the appropriate asset class:

We can reference the FASB AMC Master Glossary to determine the type of asset class and where on the balance sheet cryptocurrencies should be recorded. 

FASB defines Intangible Assets “as assets (not including financial assets) that lack physical substance.” This definitely fits the bill for cryptocurrencies.

The following asset classes in GAAP can be ruled out as digital assets do not meet the definition:

  • Cash - Digital assets are not considered legal tender backed by a sovereign government (may not be the case in all jurisdictions but it is in the United States) 
  • Cash Equivalents - Digital assets generally do not have a maturity date of three months or less
  • Inventory - Digital assets are not tangible, even though they could be available for sale 
  • Financial Instrument & Financial Assets - Digital assets are not cash, ownership interest in an entity, nor representative of a contractual right to receive cash

Therefore the most appropriate option that can be accepted is to define cryptocurrency as an Intangible Asset.

Accounting for Intangible Assets:

Intangible Assets must be recorded in the balance sheet at cost. For example - if you purchased 1 BTC for $20,000 then this is the “book value” that is recorded on the balance sheet.

Companies must also determine the useful life, or the period over which an asset is expected to contribute directly or indirectly to future cash flows. Given that cryptocurrency is generally expected to extend in perpetuity - generally the common acceptance is an indefinite useful life.

Indefinite-lived intangible assets are not amortized, or expensed over the useful life, but tested for impairment. An asset would be considered impaired if the current market value exceeds that of the book value of the asset. 

Traditionally the value of these assets can be much more subjective and companies opt to test annually for impairment. Cryptocurrency is unique in this situation since there are active exchanges where a fair market value can be easily referenced leading to more frequent impairment in a bear market.

Challenges

Another challenge is the variety of digital assets in web3 with a wide range of different characteristics. The behavior and practical use of a NFT is going to be different than that of Bitcoin. This leads to a lot more interpretation and inconsistency in opinion.

Cryptocurrency is also well-documented on its historical price swings. This price volatility is one of the biggest criticisms of the currently accepted GAAP treatment.

  • If the current price of cryptocurrency plummets below the cost basis- then the asset is considered impaired and must be written down. Impairment shows up on the income statement as a non-cash operating expense. 
  • If the price skyrockets to the moon or even to the original cost basis- you cannot revalue the cryptocurrency upwards on the balance sheet.

Because of these nuances, it can be difficult to understand the actual financial position of your company under current accounting guidelines. If you are building in web3, (or adding web3 capabilities to your web2 business) using software like Tactic is essential for ensuring your business is accurately handling its crypto transactions, and has the gain/loss reporting capabilities you need to evaluate the business. 

The information in this article is for general informational purposes only and does not constitute investment, accounting, tax, or legal advice.