In a business environment that’s changing rapidly, even the currency used to pay for transactions is evolving in ways that challenge accountants and auditors.
The growing popularity of various forms of digital (or crypto) assets has required many CPAs to consider how to appropriately account for them under GAAP. Questions and answers related to this issue are included in a free practice aid published Monday by the AICPA that provides nonauthoritative guidance on how to handle accounting questions related to digital assets.
The practice aid addresses 10 questions about how to account for digital assets under GAAP. The guide defines digital assets broadly as “digital records, made using cryptography for verification and security purposes, on a distributed ledger” (referred to as a blockchain). Digital assets are used for a variety of purposes, including as a medium of exchange, as a representation to provide or access goods or services, or as a financing vehicle, such as a security, among other uses.
“This represents a great first step in addressing some of the most frequent accounting questions that people have been asking,” said Matthew Schell, CPA, a partner with Crowe LLP and co-chair of the AICPA Digital Assets Working Group, which produced the guide. “While we haven’t solved everything, we are making progress in providing needed guidance.”
The AICPA formed the Digital Assets Working Group as a joint working group under the Financial Reporting Executive Committee and the Assurance Services Executive Committee. The working group consists of two subgroups — one focused on accounting topics, the other on auditing topics.
The accounting subgroup was tasked with developing nonauthoritative guidance on accounting for digital assets and related transactions under GAAP. The guidance is intended for financial statement preparers and auditors with a fundamental knowledge of blockchain technology.
The practice aid addresses the following questions, divided into six key areas.
Classification and Measurement When an Entity Purchases Crypto Assets
- Question 1: How should an entity that does not apply specialized industry guidance (for example, it is not applying FASB Accounting Standards Codification (ASC) Topic 946, Financial Services — Investment Companies) account for purchases of crypto assets for cash?
Recognition and Initial Measurement When an Entity Receives Digital Assets That Are Classified as Indefinite-Lived Intangible Assets
- Question 2: Entity A enters into a contract with a customer to deliver a good or service that is an output of its ordinary activities in a concurrent exchange for a fixed number of a digital asset that will be held in its own account and not through a custodian. At contract inception, Entity A transfers control of the good or service to the customer and concurrently receives the digital asset in return. The digital asset received is accounted for as an indefinite-lived intangible asset, and the contract is within the scope of FASB ASC Topic 606, Revenue From Contracts With Customers. How should Entity A account for the receipt of the digital asset as consideration under a revenue contract with a customer?
- Question 3: If the facts in Q&A 2 changed and Entity A were to receive the digital asset in the future rather than concurrently with the exchange of the good or service, what additional considerations, outside of FASB ASC Topic 606, might be necessary for Entity A?
Accounting for Digital Assets Classified as Indefinite-Lived Intangible Assets
- Question 4: How should an entity account for digital assets that are classified as indefinite-lived intangible assets subsequent to their acquisition?
- Question 5: If a digital asset is classified by an entity as an indefinite-lived intangible asset and identical digital assets are reportedly bought and sold on a market at a price below its current carrying value, is this activity an impairment indicator, and if so, should an impairment charge be recorded?
- Question 6: If the fair value of a digital asset that is classified as an indefinite-lived intangible asset has declined below the carrying value in the middle of a reporting period (that is, an impairment has occurred), does impairment need to be recorded if the fair value has recovered by the end of the same period?
- Question 7: How should an entity determine the unit of account when assessing impairment of digital asset holdings accounted for as an indefinite-lived intangible asset?
Measurement of Cost Basis of Digital Assets That Are Classified as Indefinite-Lived Intangible Assets
- Question 8: When selling a portion of an entity’s digital asset holdings that are accounted for as indefinite-lived intangible assets, how should an entity determine the cost basis of the units sold?
Derecognition of Digital Asset Holdings That Are Classified as Indefinite-Lived Intangible Assets
- Question 9: How should an entity account for the sale of digital asset holdings that are accounted for as indefinite-lived intangible assets?
Recognition of Digital Assets When an Entity Uses a Third-Party Hosted Wallet Service
- Question 10: When an entity (the depositor) holds its digital asset in a third-party hosted wallet service (the custodian), should the digital asset be recognized on the financial statements of the depositor or the custodian?
Digital assets and the associated underlying technology are an evolving area and may change accordingly, the AICPA said in a news release. Questions, examples, challenges, risks, considerations, and potential procedures listed in the practice aid should not be considered exhaustive. Preparers, auditors, and those charged with governance need to stay abreast of developments and consider the implications of those developments, the AICPA said.
Content related to the auditing of digital assets is expected to be added to the practice aid early next year.
— Jeff Drew (Jeff.Drew@aicpa-cima.com) is a JofA senior editor.