What impact do the new accounting standards for cryptocurrency assets in the United States bring? A detailed explanation of cryptocurrency asset accounting treatment

Author: TaxDAO

With the development and popularization of crypto assets, more and more companies are beginning to hold or use crypto assets in search of investment returns, improving payment efficiency, or expanding business models. The United States is one of the largest crypto asset markets in the world and one of the earliest countries to venture into the field of crypto assets. The holdings and usage of crypto assets by U.S. listed companies vary widely; in addition to purchasing and holding mainstream cryptocurrencies like Bitcoin for investment (such as MicroStrategy and Tesla), using cryptocurrencies as a payment method for goods or services (such as Square), or developing blockchain-based applications using platforms like Ethereum (such as Thermo Fisher Scientific) have also become directions for business expansion among major companies.

However, there is significant disparity and uncertainty in the accounting treatment and information disclosure of crypto assets by U.S. listed companies. Due to the lack of specific guidance on crypto assets in U.S. Generally Accepted Accounting Principles (US GAAP), different companies adopt different accounting models to account for and report crypto assets, which does not meet the comparability requirements of accounting information. To address this issue, the Financial Accounting Standards Board (FASB) passed a proposed accounting standards update (hereinafter referred to as the 2023 ASU) in September of this year, requiring that crypto assets meeting specific conditions be measured at fair value and disclosed separately.

This article aims to analyze and compare the accounting subjects and the basis and impact of their choices regarding crypto assets by U.S. listed companies before and after the release of the 2023 ASU, exploring the following three aspects:

1. The accounting subjects and methods adopted by U.S. companies for crypto assets before the ASU update;
2. The drawbacks of the accounting rules prior to the ASU update;
3. The accounting rules for crypto assets after the ASU update and the impact of the ASU update.

Current Accounting Subjects for Crypto Assets Used by U.S. Companies

1.1 Accounting Standards and Regulatory Requirements for U.S. Listed Companies

U.S. Generally Accepted Accounting Principles (US GAAP) is a set of authoritative non-governmental accounting standards issued and maintained by the Financial Accounting Standards Board (FASB), which must be followed by U.S. listed companies. US GAAP includes the following:

• Accounting Standards Codification (ASC): The only official source of US GAAP, covering accounting rules and guidance across various industries and topics.
• Accounting Standards Updates (ASU): Used to communicate changes to the ASC, including changes to informal/non-mandatory content issued by the U.S. Securities and Exchange Commission (SEC). ASUs are not authoritative standards but explain how, why, and when the FASB has changed US GAAP.
• Concepts Statements: These guide the selection of economic phenomena that should be recognized and measured by establishing the objectives of financial reporting, the quality characteristics of useful financial information, and other concepts.

In addition to adhering to US GAAP, U.S. listed companies must also comply with the rules or "listing standards" set forth by the SEC, including rules related to corporate governance and audit committees.

1.2 Accounting Treatment of Crypto Assets Under Current Accounting Standards

Before the release of the 2023 ASU, the accounting treatment of crypto assets was not uniform. In 2020, the American Institute of Certified Public Accountants (AICPA) established a Digital Assets Working Group and published an unofficial guide titled "Accounting and Auditing for Digital Assets" (hereinafter referred to as the "Guide") to guide accountants in the accounting treatment of digital assets. The Guide states that general crypto assets should be recorded as indefinite-lived intangible assets. Indefinite-lived intangible assets are those that do not have legal, regulatory, or contractual factors limiting their useful life (such as trademarks, copyrights, or licenses). These assets do not require amortization but must undergo at least an annual impairment test to determine whether their carrying amount exceeds their fair value. If impairment occurs, an impairment loss must be recognized; however, if appreciation occurs, previously recognized impairment losses cannot be reversed.

The Guide also specifies the accounting treatment of crypto assets in the following three scenarios:

1. In the following situations, crypto assets are recorded as financial assets, namely: crypto assets provide a contractual right to receive cash or another financial instrument (such as stablecoins) (including the right to redeem stablecoins for cash from the issuer).
2. Certain broker-dealers may hold digital assets for sale in the normal course of business, in which case crypto assets can be recorded as inventory measured at fair value, with changes in fair value recognized in profit or loss.
3. Companies that meet the criteria of an investment company should determine whether the crypto assets they acquire represent debt securities, equity securities, or other investments and should measure their investments at fair value.

Based on the different purposes for holding crypto assets, this article will study three typical companies that hold a large amount of crypto assets: long-term investment companies in crypto assets, mining companies, and crypto asset trading platforms, exploring how they account for crypto assets.

1.2.1 Accounting Treatment of Long-Term Investment Companies in Crypto Assets

Companies that invest in crypto assets for the long term do not hold crypto assets for speculative purposes but rather believe in the long-term value of crypto assets. Therefore, they generally classify crypto assets as indefinite-lived intangible assets and measure them at original cost. If the cryptocurrency experiences impairment during the holding period, an impairment provision is recognized. Companies that handle crypto assets in this manner include Tesla, Square, and MicroStrategy. Due to the significant market price fluctuations of crypto assets like Bitcoin, impairment provisions need to be recognized when prices fall; however, price increases do not enhance the carrying amount of the assets. Thus, for crypto assets measured as indefinite-lived intangible assets, their carrying amount is often the lowest market price, which may affect the assessment of the company's profitability and could lead to a significant discrepancy between the carrying value of cryptocurrencies and their actual value.
For example, Tesla lists digital assets alongside intangible assets in the "non-current assets" section of its 2022 annual report balance sheet, which may consider the purpose of holding digital assets (primarily Bitcoin): believing in the potential of digital assets as a long-term cash substitute rather than treating them as short-term financial instruments. At the same time, in Tesla's cash flow statement, cash inflows and outflows related to the purchase and sale of Bitcoin are listed under cash flows from investing activities (with line items labeled as purchases of digital assets & proceeds from sales of digital assets).

1.2.2 Accounting Treatment of Mining Companies

After acquiring crypto assets, mining companies sell them on the market for profit. Since mining companies hold/acquire the same type of crypto assets (primarily Bitcoin) as long-term investment companies, they account for the value of crypto assets in the same way: recording them as indefinite-lived intangible assets. However, unlike Tesla, most mining companies (such as Bit Digital, CleanSpark, and Riot Blockchain) list their crypto assets as current assets, which directly conflicts with the nature of intangible assets but better reflects that these companies do not hold cryptocurrencies long-term but rather convert them into profits.
If the process of converting crypto assets into profits is to be reflected in the cash flow statement, there are generally two measurement methods. One is treated as "cash from investing activities," and the other as "cash from operating activities." The former is adopted by most mining companies, while fewer companies, such as Coin Citadel, use the second method. Some analyses suggest that treating the conversion of crypto assets into profits as investing activities may mislead investors' decisions by affecting the company's cash ratio from its main business, as crypto assets actually originate from the company's core business rather than investments.

1.2.3 Accounting Treatment of Crypto Asset Trading Platforms

A typical example of a crypto asset trading platform is Coinbase, whose main business is to provide a trading platform for the public to trade crypto assets and earn fees. Similar to mining companies, the fees collected by Coinbase also undergo a "conversion to profit" process. According to Coinbase's prospectus, the crypto asset revenue earned from each transaction will be measured based on the fair value of the crypto assets. Coinbase will convert these transaction revenues into U.S. dollars once they reach a certain amount to reduce financial risks arising from changes in fair value.
In addition, like Tesla, Coinbase also holds a certain amount of crypto assets for the long term, and the accounting treatment for this portion of assets is the same as that of Tesla.

1.3 Conflicts and Lag of Current Rules Compared to International Financial Reporting Standards (IFRS)

A review of the accounting treatment of crypto assets by U.S. companies before the release of the 2023 ASU reveals that this treatment conflicts with International Financial Reporting Standards (IFRS) in certain respects. The most apparent conflict lies in the measurement of intangible assets. U.S. companies, represented by Tesla, value cryptocurrencies using the cost method, and after impairment, they do not adjust upwards. However, International Accounting Standard 38—Intangible Assets allows intangible assets to be measured using either the cost model or the revaluation model (if applicable). Since most companies hold actively traded cryptocurrencies, those following IFRS typically measure the value of cryptocurrencies at fair value, which allows for the reversal of impairment losses. For U.S. companies using the cost method, if losses occur before selling crypto assets, profitability may be underestimated.
Secondly, the current rules provide insufficient guidance on the presentation of crypto assets on the balance sheet. In fact, treating crypto assets as intangible assets may not adequately reflect the liquidity of a company's wealth; for example, Tesla lists "digital assets" as non-current assets, but the Bitcoin it holds is highly liquid and can easily be converted into cash in the market. In contrast, Bitmain lists its held digital assets as current assets in its prospectus, even though it also states plans to "hold Bitcoin for the long term" like Tesla. Therefore, further accounting standards are needed to clarify whether crypto assets should be classified as current or non-current assets.
Finally, the current accounting standards fail to accurately assess the profitability of mining companies. When the revenue generated from the core business of mining companies (Bitcoin) is converted into U.S. dollars, it is measured as "cash from investing activities" rather than "cash from operating activities," which distorts the ability of mining companies to generate cash flow from their core business.

Release of the 2023 ASU and Its Impact

2.1 Main Content of the 2023 ASU

On March 23, 2023, the Financial Accounting Standards Board (FASB) released a proposed accounting standards update (ASU) titled "Intangible Assets—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting and Disclosure for Crypto Assets." This new rule was passed in September of this year, requiring that crypto assets meeting the following conditions be measured at fair value and that changes in fair value be recognized in comprehensive income for each reporting period:

• The crypto asset meets the definition of an intangible asset under US GAAP;
• The holder has no enforceable rights or claims to the underlying goods, services, or other assets;
• The crypto asset resides on a distributed ledger based on blockchain technology;
• The crypto asset is protected through cryptographic technology;
• The crypto asset is fungible, meaning it can be exchanged with similar assets;
• The crypto asset is not created or issued by the reporting entity or its related parties.

This new rule also requires that crypto assets be presented separately on the balance sheet and that detailed information about crypto assets and activities be disclosed in the notes, such as specific assets held, restricted assets, fair value levels, and related party transactions.

The purpose of this new rule is to address the current lack of guidance on crypto assets in GAAP and the inconsistencies and lack of comparability resulting from different entities adopting different accounting models. The FASB believes that measuring crypto assets at fair value can better reflect their economic substance and market volatility, thereby enhancing the relevance and reliability of financial reporting.

This new rule is expected to be officially released by the end of 2023 and will take effect in 2025, applicable to all listed and private companies holding or investing in crypto assets. However, companies may choose to adopt these rules early.

2.2 Impact of the 2023 ASU: A Key Step

Previously, TaxDAO published an article titled "Detailed Explanation of New Changes in U.S. Cryptocurrency Accounting Rules," analyzing the accounting, tax, and practical impacts brought by the 2023 ASU. Based on this, this article will focus on examining the impact of the 2023 ASU on industry accounting practices.

As mentioned earlier, valuing crypto assets using the cost method can lead to inaccurate valuations. The newly revised accounting standards directly align with the practices of International Accounting Standards, using the fair value method to value crypto assets in order to accurately reflect the company's value. However, compared to the annual impairment accounting under the cost method, the fair value method requires more frequent assessments of whether the value of crypto assets has changed and the recognition of corresponding fair value changes in profit or loss, which adds a burden to the company's accounting. For companies like MicroStrategy and Tesla that invest in crypto assets for the long term, the new accounting method will increase their reported profits.

Although the 2023 ASU does not resolve all issues with the current rules, such as not explicitly addressing the liquidity treatment of crypto assets or not covering NFTs and wrapped tokens, it is a key step in regulating the accounting for crypto assets. A journey of a thousand miles begins with a single step; the 2023 ASU, starting from the commonalities of cryptocurrencies, is undoubtedly a good beginning. Only by reaching a consensus and forming mature solutions in general areas can there be a continuous source of vitality for regulations in niche areas, ensuring steady and sustainable progress.

In addition to addressing the issues of accounting standards for crypto assets in the U.S. domestic market, the 2023 ASU also holds significant importance for the harmonization of international accounting standards. Currently, the two main sets of accounting standards widely used or referenced internationally are US GAAP and IFRS, which have some differences and conflicts, leading to varying accounting treatments for the same economic phenomena in different countries or regions, affecting the quality and comparability of accounting information. The release of the 2023 ASU brings U.S. accounting standards for crypto assets closer to international financial reporting standards, especially in terms of fair value measurement and the reversal of impairment losses. This helps narrow the gap between the two sets of accounting standards and enhances the coordination of international accounting standards. At the same time, it provides a reference for other countries or regions to formulate or improve their accounting standards for crypto assets, promoting the development and regulation of the global crypto industry.