The treatment of cryptocurrencies in accounting remains a hotly debated topic among financial experts, largely due to the absence of clear guidelines within US GAAP and IFRSs. This lack of formal direction leaves companies holding significant digital currency assets, primarily Bitcoin, with limited options but to follow industry norms. However, a turning point came in July 2018 when a leading "Big Four" accounting firm published an opinion on cryptocurrency classification. According to current principles, cryptocurrencies typically fall into categories such as cash equivalents, resources, or financial instruments.
Assets classified as cash equivalents are known for their short-term nature, high liquidity, and easy convertibility into predetermined cash amounts with minimal risk of value fluctuation. However, cryptocurrencies diverge from this definition due to their distinct characteristics. They lack the backing of a sovereign authority, are not universally accepted as a form of payment, cannot directly set prices for goods and services, and face significant value fluctuations, making them challenging to convert into predetermined cash amounts.
Inventories, on the other hand, are assets held to generate future sales in the ordinary course of business. In certain scenarios, cryptocurrencies may be categorized as inventory items (e.g., by brokers) or financial instruments (e.g., by investment companies). Yet, they fail to meet the criteria for financial assets, as they do not confer ownership rights or represent contracts with future rights or liabilities.
The prevailing opinion suggests that cryptocurrencies are most often treated as intangible assets by entities. Notably, global electric vehicle giant "Tesla" stands out as the largest company to invest in cryptocurrencies. In its 2020 10-K filing, Tesla disclosed that it recorded Bitcoin as an intangible asset with indefinite maturity, subject to regular impairment tests every three months. Despite the company's decision not to reverse impairments in case of further Bitcoin price rises, given its high volatility, more frequent impairment tests are recommended.
Conclusion
In summary, the classification of cryptocurrencies significantly impacts an entity's financial statements, given the substantial market value fluctuations. Selecting appropriate accounting policies in line with prevailing standards and industry practices is crucial for accurately reflecting cryptocurrency assets and their associated risks.
Author:
Tigran Ghambaryan
Accountant, Legelata Legal and Tax
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This material is produced for Legelata LLC. The information contained in this piece is provided for general informational purposes only and does not contain a comprehensive analysis of each item described. Prior to undertaking (or not to undertaking) any actions, the reader is advised to seek professional advice tailored to their specific situation. Legelata or the author accepts and holds no liability for acts or omissions taken in reliance upon the contents of the contained information in this material.
LEGELATA LLC 29.05.2024
