A Deep Dive into GAAP, IFRS, and the latest FASB Accounting Regulations for Cryptocurrency

The IFRS Lens

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Applying IFRS to cryptocurrencies presents an intriguing mix of challenges and opportunities. While IFRS does not currently have a standard specifically addressing cryptocurrencies, its principle-based approach allows for some flexibility. The primary standards invoked are IAS 38 (Intangible Assets) and IAS 2 (Inventories), each presenting unique implications.

Cryptocurrencies as Intangible Assets

Under IAS 38, an intangible asset is identifiable, non-monetary, and without physical substance. Cryptocurrencies generally meet these criteria, leading some companies to classify them as intangible assets. However, the requirement that an intangible asset’s fair value can be measured reliably may pose challenges due to the high volatility of cryptocurrency markets.

Consider a scenario where a company has acquired Bitcoin as an investment. If the fair value of Bitcoin can be determined reliably, it is recorded at cost upon acquisition. Subsequent measurement can be tricky, though. Under IAS 38, the company must assess at each reporting date whether the asset’s carrying amount may not be recoverable. If the carrying amount exceeds its recoverable amount, the asset is considered impaired, and the company must recognize an impairment loss.

Cryptocurrencies as Inventories

IAS 2 comes into play when a company acquires cryptocurrencies for sale in the ordinary course of business. In this case, the cryptocurrencies are considered inventories and are initially recognized at cost. Subsequent measurement is at the lower of cost and net realizable value.

For instance, if a company regularly trades in Ethereum and bought units at $2,000 each, but the price at the end of the reporting period is $1,500, the company would have to reduce the carrying value of the Ethereum inventory to reflect this decrease.

Cryptocurrency Transactions

IFRS also provides guidance for companies that accept cryptocurrencies as payment for goods or services. Similar to GAAP, the transaction should be measured at the fair value of the consideration received. This requires determining the cryptocurrency’s fair value at the time of the transaction and could be complicated by the price volatility of cryptocurrencies.

Future Directions: IFRS and Cryptocurrency

The IASB, which sets IFRS, is aware of the challenges posed by cryptocurrencies and has an ongoing project to consider whether to develop specific guidance. The project is exploring the information needs of users of financial statements and considering whether companies can provide that information using existing IFRS Standards.

Moreover, the rise of new forms of cryptocurrencies, such as Central Bank Digital Currencies (CBDCs), may necessitate new or revised accounting treatments under IFRS. For instance, stablecoins, given their design to minimize price volatility, may not present the same measurement challenges as other cryptocurrencies.

FASB’s New Chapter on Cryptocurrency Accounting

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In a significant move, the Financial Accounting Standards Board (FASB) issued ASU 2023–08 on December 13, 2023. The update brings new accounting and disclosure requirements for specific crypto assets. Notably, it mandates entities to measure these crypto assets at their fair value. Furthermore, changes in fair value must be recorded in the net income of each reporting period. Entities can start applying these changes for fiscal years beginning after December 15, 2024, and for interim periods within those years. Early adoption is also an option.

FASB responded to stakeholders’ concerns with this new guidance. Previously, under ASC 350, crypto assets were treated as indefinite-lived intangible assets, measured at historical cost minus impairment. However, stakeholders felt it failed to capture the true economic nature of crypto assets and unnecessarily complicated the recognition of impairments. The new guidelines aim to address these issues, providing a more faithful representation of crypto assets and simplifying compliance.

The ASU is wide-ranging, applying to all entities holding certain crypto assets, including private companies and non-profit entities. Crypto assets, as per the new guidance, are assets meeting specific criteria, such as:

• Conforming to the U.S. GAAP definition of an intangible asset,
• Lacking “enforceable rights to or claims on underlying goods, services, or other assets,”
• Being created or existing on “a distributed ledger based on blockchain or similar technology,”
• Being safeguarded by cryptography,
• Being fungible,
• Not being “created or issued by the reporting entity or its related parties.”

However, it’s important to note that not all digital assets will fit these criteria. For example, nonfungible tokens (NFTs) and wrapped tokens are generally excluded from the guidance.

Entities are now required to measure crypto assets at fair value, with changes in fair value reported in net income for each reporting period. For determining the fair value, entities are advised to refer to the existing guidelines in ASC 820.

Additionally, ASU 2023–08 necessitates changes in presentation and disclosure. Entities must separately present the aggregate amount of “crypto assets measured at fair value” from other intangible assets not measured at fair value on their balance sheet. Changes in the fair value of crypto assets must be included in net income, separate from changes in the carrying amount of other intangible assets.

A Dynamic Landscape

The application of GAAP and IFRS to cryptocurrencies is not static. As digital currencies evolve and their use becomes more widespread, accounting standards and regulatory bodies will continue to adapt. For instance, the IASB has an active project considering whether to develop explicit guidance for cryptocurrencies.

The challenge lies not only in understanding the current application of these standards to cryptocurrencies but also in keeping up with their evolution. For example, the rise of stablecoins and Central Bank Digital Currencies (CBDCs) may demand new accounting treatments.

The application of GAAP and IFRS to cryptocurrencies is like charting new territory. It’s a world where traditional accounting concepts intersect with groundbreaking technology, creating a landscape that’s complex but fascinating.

As we continue to explore this territory, we can expect to see more changes, challenges, and opportunities. Companies that stay informed and adapt to these changes will not only ensure compliance but also gain a competitive edge in this brave new world of digital finance. Understanding these principles isn’t just about getting the numbers right — it’s about being part of the revolution that’s redefining the future of finance.

References

PJ Theisen (December 15, 2023) FASB Issues Final Standard on Crypto Assets

Naazneen Moosa (March 7, 2023) Accounting for cryptocurrencies

Mridula Sharma (October 18, 2023) Accounting for Cryptocurrency Transactions