Question

Software Provider (the “Company”) supports and sells computer software. The Company accepts cryptocurrencies (e.g., Bitcoin, Ether, Ripple) as payment for the sale of its computer software. The Company holds its cryptocurrencies partially for investment (e.g., expectation that they will appreciate in value) and partially to use in the future to purchase goods or services.

Cryptocurrency is a new type of value and payment method that is different from fiat currency (e.g., U.S. dollars and foreign currencies). Presently, cryptocurrencies have no government backing or recognition by a central authority as legal tender. Their value is only supported by supply and demand.

Cryptocurrencies do not have a physical form but exist as immutable distributed ledgers (electronic records) maintained on public blockchains. They are different than electronic instances of cash, such as an online bank account, in that they are not linked to a physical currency.

Bitcoin and other similar “coins” use cryptography (e.g., use of codes to secure communications) to control the security and creation of these coins, which led to the term “cryptocurrencies.”

Cryptocurrencies are usually obtained by purchasing or receiving them on a peer-to-peer basis. That is, they can be received directly from a counterparty in exchange for an asset or service or they can be purchased in exchange for a fiat currency, often from an exchange that specializes in cryptocurrencies.

For a cryptocurrency to function as a means of peer-to-peer exchange, a ledger needs to be maintained for tracking ownership of the cryptocurrency. For cryptocurrencies, this electronic ledger is maintained using blockchain. There are many copies of this ledger and many ledger keepers. Distributing the processing allows many users to each play a small part in the maintenance of the ledger system; this means that the security of the system does not rely on a few individuals.

The amount of coins for a particular cryptocurrency that are in circulation is tightly controlled. For example, for Bitcoin there is a limit on the number of coins that can exist. New Bitcoins are only created as payment to processors (called “miners”) for providing the service of validating and distributing an electronic ledger of these transactions to those involved in maintaining the blockchain.

Required:

1. How should the Company’s holdings of cryptocurrency be classified in the statement of financial position under U.S. GAAP?

2. How should the holdings of cryptocurrency be initially and subsequently measured under U.S. GAAP?

What are the paragraphs in ASC FASB where these answers are found?

Answer 1

A icrypto icurrency iis ia idigital ior ivirtual icurrency ithat iis isecured iby icryptography, iwhich imakes iit inearly iimpossible ito icounterfeit ior idouble-spend. iMany icrypto icurrencies iare idecentralized inetworks ibased ion iblock ichain itechnology—a idistributed iledger ienforced iby ia idisparate inetwork iof icomputers. iA idefining ifeature iof icrypto icurrencies iis ithat ithey iare igenerally inot iissued iby iany icentral iauthority, irendering ithem itheoretically iimmune ito igovernment iinterference ior imanipulation.

Bit icoin iis ia icrypto icurrency, imeaning iit’s isupported iby ia isource icode ithat iuses ihighly icomplex ialgorithms ito iprevent iunauthorized iduplication ior icreation iof iBitcoin iunits. iThe icode’s iunderlying iprinciples, iknown ias icryptography, iare ibased ion iadvanced imathematical iand icomputer iengineering iprinciples. iIt’s ivirtually iimpossible ito ibreak iBitcoin’s isource icode iand imanipulate ithe icurrency’s isupply.

A icrypto iasset iand ia icryptocurrency ihave ithe isame idefinition iaccounting-wise. iEither iit iemphasizes ion ithe icryptographic iasset ior ithe icryptographic icurrency. iIn iboth icases, ithose iare idigital iassets, inot iphysical iones, iand ithey istand ion ithe iasset ipart iof ithe ibalance isheet. iIt’s isometimes ichallenging ito iclearly idefine iin iwhich icategory iof iassets ithey istand. iWe ineed ito iunderstand imore. iCrypto iassets irepresents idigital iassets. iCrypto icurrency isuch ias ibit icoin iand iether iis ithe ibest iexample iof icrypto iassets iOther ithan ithis itwo i, iother ialternatives iare iBit icoin iCash i, iRipple i, ilite icoin ietc.

Bit icoin iis ia ivirtual icurrency, ior icrypto icurrency, ithat’s icontrolled iby ia idecentralized inetwork iof iusers iand iisn’t idirectly isubject ito ithe iwhims iof icentral ibanking iauthorities ior inational igovernments. iAlthough ithere iare ihundreds iof icrypto icurrencies iin iactive iuse itoday, iBit icoin iis iby ifar ithe imost ipopular iand iwidely iused i– ithe iclosest icrypto icurrency iequivalent ito itraditional, istate-minted icurrencies.

Like itraditional icurrencies, isuch ias ithe iU.S. idollar, iBit icoin ihas ivalue irelative ito iother icurrencies iand iphysical igoods

Crypto icurrency icommonly iterm ias iToken i. iInitial iCoin iOffering irepresents iissue iof inew icoins irecorded ion ia idistributed iledger i( ivirtually ialways iEthereum) i. iAn iICO irepresents ian iattractive isource iof ifinancing ifor ia istartup ibusiness i. iAs iit imanaged icost i, itime iand idiscomfort iinvolved iin iobtaining ifinance ithrough itraditional imeans isuch ias ibanks i, iventure iCapitalist ior istock imarket i.

Crypto iassets iconstitute ian ievolving i, ifacts igrowing ibut istill irelatively inew iasset iclass. iDue ito iso imany iinnovation iinvolved iin ithis imatter i, iit iis idifficult ito idraw iany igenerally iacceptable iaccounting itreatment

As iper icurrent istandard i, iDigital icurrency iis inot ia ifinancial iInstrument idue ito ilack iof icontractual irelationship i. iWhether iDigital icurrency ishould ibe itreated ias i“ iIntangible iassets” i? ias iper iIAS i38 iIntangible iassets imean, idigital icurrency iis ia inon-monetary iasset iwithout iphysical isubstance iOr iit ishould ibe itreated ias iInventory i( iunder iIAS i2.)

Crypto icurrency icannot ibe idisclosed iunder iIAS i7 i“ iCash iand iCash iEquivalent ibecause ithey iare isignificantly ivolatile iin inature

Trust ime ithere iis ilack iof iguidance iat ipresent ion idigital icurrencies iAs iper iExposure idraft iVirtual icurrencies iat imarket iprice iat ithe iBalance isheet idate iif ithere iis ian iactive imarket i. iAny idifference iin iCarrying ivalue iand iMarket iprice i– ineed ito iaccount ias iGain/ iLoss

In icase iactive imarket iis inot iavailable i, ithen iwe ineed ito igo iwith idisposal iapproach i. iit iwill imeasure iat ilower iof ithe icost ior iestimated idisposal ivalue i. iloss irecognized icannot ibe ireversal isubsequently

Dealer iof iVirtual icurrency ineed ito irecognized ias ian iasset iand imade ian iagreement iwith icustomer iDealer iis irequired ito irecognized ithe iobligation ito ireturn ithe ivirtual icurrency ito ithe icustomer ias ia iLiability i i i i

i iUS iGAAP i– iAs iper iIFRS i, ithere iis ino ispecific iaccounting istandard irelates ito iCrypto icurrency iunder iUS iGAAP i. iUnder iUS iGAAP i, imay ibe ithis ione iis itreated ias iIndefinite iperiod iof iIntangible iassets.

Crypto icurrency iis inot itreated ias icash i– iit iis ian iexchange imedium. iIt iis inot irepresents iany ilegal itender ior ibacked iby iSovereign iFund i. iCrypto icurrency icannot ieasily iconvertible iinto icash

As imentioned iabove i, icrypto icurrency imay ibe itested ifor iImpairment idue ito iIndefinite iperiod iof iIntangible iassets

Crypto i icurrency imay ibe itreated ias iInventory i( isame ilike iBroker iholds iInventory)

At ipresent i, iUnder iIFRS i+ iUS iGAAP i- ino ispecific istandard iapplicable ifor iCrypto icurrency i.Above iwe ihave iseen ithat ithis icurrency iis inot ifalling iunder iIAS i7 i( imainly idue ito ihigh ivolatility iand icannot iconvert ieasily iin icash i) i, icannot ibe itreated ias iDebt ior iEquity iand iaccounted iunder iFVTPL i( iFair ivalue ithrough iPNL) i, iWe ican imost iprobable itreated ithis icurrency iunder iIntangible iasset i( iindefinite iperiod i) ior iunder iInventory imethod i. iAs iper iIFRS i, iIASB iboard ido imarket iprice iand icarry ivalue iadjustment iand itransfer igain i/ iloss iin ito iPL i.