Question

How should a Company’s holdings of cryptocurrency be classified on the balance sheet under U.S. GAAP?

Answer 1

Solution:

Accounting for Cryptocurrencies:

The guidance in U.S. GAAP does not currently directly address the accounting for cryptocurrencies. For the reasons explained below, we believe that cryptocurrencies should generally be accounted for as indefinite-lived intangible assets under ASC 350; however, there may be limited circumstances in which cryptocurrencies are (1) held for sale in the ordinary course of business and thus considered inventory (as in the case of a broker) or (2) accounted for as an investment by an investment company.

The ASC master glossary defines intangible assets as “[a]ssets (not including financial assets) that lack physical substance. (The term intangible assets is used to refer to intangible assets other than goodwill.)” Cryptocurrencies are not financial assets because they are not cash, an ownership interest in an entity, or a contract establishing a right or obligation to deliver or receive cash or another financial instrument. Since they lack physical substance, they are generally considered intangible assets.

Connecting the Dots — Cryptocurrencies Are Not Cash or Cash Equivalents

The ASC master glossary states that cash “includes not only currency on hand but demand deposits with banks or other financial institutions.” While the ASC master glossary includes currency in the definition of cash, it does not define currency.

Cryptocurrencies can be used as a medium of exchange if both parties agree to the exchange; however, cryptocurrencies are not backed by a sovereign government and do not represent legal tender that must be accepted as a form of payment. Therefore, we do not believe that cryptocurrencies are cash.

Further, they are not cash equivalents. The ASC master glossary defines “cash equivalents” as “short-term, highly liquid investments” that are “[r]eadily convertible to known amounts of cash” and “[s]o near their maturity that they present insignificant risk of changes in value because of changes in interest rates.” Cryptocurrencies are not readily convertible to known amounts of cash and have more than an insignificant risk of change in value.

ASC 350 requires entities to initially record intangible assets at cost (e.g., consideration transferred). As intangible assets, cryptocurrencies have indefinite lives and therefore must be tested for impairment at least annually and more frequently if events or changes in circumstances indicate that it is more likely than not that they are impaired. A decline below cost in a quoted price on an exchange may be an event indicating that it is more likely than not that a cryptocurrency is impaired.

Cryptocurrencies used as a medium of exchange or for speculative purposes are not “inventory,” which the ASC master glossary defines, in part, as “[t]he aggregate of those items of tangible personal property that [are held for sale] in the ordinary course of business.” Some cryptocurrencies may be held for sale in the ordinary course of business as part of a primary business model in a manner similar to how commodity inventories are held by brokers. We believe that in the absence of future standard setting by the FASB, it may be acceptable in certain circumstances for entities to account for cryptocurrencies as inventory if part of their primary business is to hold such cryptocurrencies in a manner similar to how brokers hold inventories. However, entities should carefully consider their facts and circumstances and consult with their accounting advisers before concluding that accounting for cryptocurrencies as inventory is appropriate.

Entities within the scope of ASC 946 (i.e., investment companies) that hold cryptocurrencies as investments should account for them as they would any other investment that they measure initially and subsequently at fair value.