The question of how to account for digital assets has emerged as a challenging one for accountants as use of these assets becomes increasingly common.
Although accounting for exchange-traded digital assets and commodities was added to FASB's research agenda in December, authoritative guidance on this topic doesn't seem imminent.
To help accountants and auditors in this difficult area, AICPA & CIMA have created a practice aid that contains nonauthoritative guidance developed by the Digital Assets Working Group. New Q&As added to the practice aid this month address the accounting for:
- Contracts involving cryptoassets that may contain derivatives.
- Borrowing and lending of cryptoassets.
- Cryptoasset mining activities.
"Hopefully with those pressing and emerging issues, we are providing guidance that is timely and helpful," said Lan Ming, CPA, a partner at EY and a member of the Digital Assets Working Group.
Contracts involving cryptoassets that may contain derivatives
Entities might enter into a contract involving a right to receive a fixed quantity of cryptoassets through a variety of transactions. For example, someone might contract to pay you 10 bitcoins in 30 days for a service that you provide them.
The practice aid explains that accounting for that right to receive cryptoassets would typically involve a consideration of whether derivative accounting under FASB Accounting Standards Codification (ASC) Topic 815, Derivatives and Hedging, would apply.
In the example cited in Q&A 24 in the practice aid, an entity assesses whether derivative accounting is required and whether the right to receive the cryptoasset contains an embedded derivative that should be bifurcated and accounted for separately.
Borrowing and lending
Entities often borrow and lend cryptoassets, and Ming said it's important to note the asymmetry in that accounting.
"There's no symmetry between the borrowing and lending side of the accounting," she said. "You have to follow separate accounting models for each."
Entities that are lending their cryptoassets need to think about the accounting under FASB ASC Topic 606, Revenue From Contracts With Customers, or FASB ASC Subtopic 610-20, Other Income — Gains and Losses From the Derecognition of Nonfinancial Assets, Ming said. One key element of accounting for lending of cryptoassets is the matter of control of those assets.
"Within those accounting frameworks, you need not only to think about when you lend crypto to somebody else, the legal title has been transferred, but also did you surrender control over those assets to the other party?" Ming said. "Because the asset you're looking at is a nonfinancial asset."
Following the example used in Q&A 25, Ming said, it shows that typically derecognition does not occur for the lender. Even though the title is legally transferred, the lender still may have to keep this asset on its balance sheet.
A cryptoasset borrower, according to the practice aid, includes the asset borrowed on its balance sheet but also recognizes an obligation to return the asset back to the lender at the end of the borrowing period.
"The complexity now comes into play," Ming said. "In this case, it's that the asset I put on my book, I'll call it an intangible asset. But the obligation I have to return is an instrument that contains a derivative that has to be bifurcated or typically should be bifurcated."
The accounting creates a mismatch, as the intangible asset is kept on the balance sheet at a cost subject to impairment, while the obligation effectively is marked to market.
The practice aid discusses accounting for two separate revenue streams related to cryptoasset mining activities on blockchain networks that use proof-of-work protocols.
When a cryptoasset mining entity successfully processes transactions on the blockchain, it may receive:
- Payment from the parties that requested the transactions (transaction fees); and
- A block reward from the blockchain network for successfully completing the validation work.
The practice aid discusses the accounting considerations when a miner is directly engaged in mining activities and when a miner mines through participation in a mining pool that is operated by a mining pool operator.
In either case, the key accounting issue to evaluate is whether the miner has a revenue contract under Topic 606.
"That's really what is going to drive the timing or amount of the revenue you recognized," Ming said.
— To comment on this article or to suggest an idea for another article, contact Ken Tysiac at Kenneth.Tysiac@aicpa-cima.com.