THE WILD WEST: ACCOUNTING FOR DISTRIBUTED LEDGERS AND CRYPTO ASSETS By DR. ETHAN KINORY RUTGERS SCHOOL OF BUSINESS-CAMDEN
When it comes to adopting distributed ledger and crypto asset technologies, one common reason why companies have hesitated is the lack of adequate regulatory guidance. Securities and Exchange Commission (SEC) Chair Gary Gensler complained that, “Right now, we just don’t have enough investor protection in crypto. Frankly, at this time, it’s more like the Wild West.”
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WINTER 2021/22 | NEW JERSEY CPA
As of May 2021, 31 states had pending legislation relating to crypto assets and blockchain concerns including California which has called for the formation of a working group to study the potential uses, risks and benefits of blockchain technology (A.B. 2658). California has also authorized its corporations to utilize blockchain ledgers to record stockholder activity (S.B. 838). Similarly, on the federal level there is a pronounced deficiency in authoritative accounting and auditing guidance. For example, there are no Financial Accounting Standards Board (FASB) Accounting Standards Codifications (ASCs) relating to digital assets, and FASB recently rejected a proposed agenda item to discuss accounting standards for cryptocurrencies. Instead, legislation at the federal level has been more focused on raising revenues by, for example, including (as of the time of this writing) provisions in the infrastructure bill to vastly increase cryptocurrency brokers’ tax reporting requirements. Since auditors are required to understand a client’s compliance with applicable regulatory requirements, this can be vexing. What is an auditor to do? Fortunately, there is some important guidance that accounting professionals can refer to. RECEIVING CRYPTO ASSETS An AICPA Practice Aid issued in June 2021 advised that crypto assets (e.g., bitcoin) received in exchange for cash should be recorded at their cost and accounted for as an indefinite lived intangible asset (FASB
ASC 350-30) and not as cash, a cash equivalent, foreign currency or financial instrument. The crypto asset should not be amortized but must be tested for impairment at least annually or more frequently if the facts and circumstances (FASB ASC 350-30-35) suggest that it is more likely than not that the asset is impaired even if the impairment is believed to be temporary in nature. If a company repurchases a crypto asset for a lower price than the carrying value of its preexisting crypto assets, this suggests that an impairment charge is necessary. Once an impairment has occurred, a write down is required for the amount by which the crypto asset’s fair value exceeds its carrying value. Impairment write downs cannot be subsequently reversed, even if the crypto asset recoups its value. Accordingly, recognition of unrealized gains on crypto assets are deferred until the time of sale, but impairment rules essentially require that losses in value be recognized much more timely. RECEIVING CRYPTO PAYMENTS The accounting treatment differs for crypto assets received in a sale. If the crypto asset is contemporaneously received from a customer in exchange for goods and services provided in the ordinary course of trade or business, the transaction should be recognized at the fair value of the crypto asset at the time of contract inception (ASC 606). Subsequent changes to the value of the crypto asset would not affect the transaction price (ASC 606-10-32-23).
