Technical Accounting

Accounting for Digital Assets

Overview

Digital assets are comprised of cryptocurrencies and non-fungible tokens (NFTs) such as Bitcoin and Ethereum. Currently, the Accounting Standards Codification (ASC) does not include formal guidance around a holder’s accounting for digital assets. However, literature issued by the AICPA and Big Four firms provide some context in how to account for them. Let’s dive in.

Accounting

In evaluating the accounting for digital assets, four different asset types were analyzed:

Cash and cash equivalents – Cash includes currency backed by sovereign governments, demand deposits with financial institutions and other accounts that have the general characteristics of demand deposits. Cash equivalents are short-term, highly liquid investments that are readily convertible to known amounts of cash and represent insignificant risk of changes in value.

Classification of digital assets as cash and cash equivalents is not applicable as they generally are not backed by sovereign governments, they are not widely accepted as legal tender, they do not have legal maturities, and they may experience significant price volatility.

Financial instruments – A financial instrument is cash, an ownership interest in an entity or a contract that imposes an obligation to deliver or a right to receive cash or another financial instrument.

Classification of digital assets as financial instruments is not applicable as they do not represent a contractual obligation to deliver or a right to receive cash or another financial instrument. Digital assets also are not cash and do not represent ownership interests in a company.

Inventory – Inventory is tangible property held for sale in the ordinary course of business, in process of production for sale or to be consumed in the production of goods or services.

Classification of digital assets as inventory is not applicable as digital assets are not tangible property.

Intangible asset – Intangible assets are assets (not including financial assets) that lack physical substance.

Classification of digital assets as intangible assets is reasonable as they are nonfinancial assets that lack physical substance.

Even though digital assets have characteristics that are not typical of intangible assets (i.e. volatile movements, fungible, traded on exchanges), they most closely assign with intangible assets. As an intangible asset, digital assets would be accounted for at historical cost using an inventory methodology (i.e. first-in first-out or last-in first-out) to record gains / losses on transactions. Additionally, note that digital assets would be considered indefinite intangible assets as opposed to definite intangible assets, and would not be amortized based on this classification.

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Use Cases

Audit Preparation

An early-stage private company approached us to help with preparation for a first-year audit. We assisted them with auditor selection and provided an overview of how a typical AICPA audit works. We reviewed all historical journal entries (5 years) to ensure the opening balance sheet was accurate and complete. Additionally, we reviewed the current year journal entries on a risk-based approach to ensure that the client had sufficient support.

We prepared a reconciliation file in Excel that included reconciliations for all balance sheet accounts. This file also included the trial balance, the roll-up of the trial balance into the financial statements, and cash flow workbook. The file was provided to the auditors, which they used to make selections for the audit. We also prepared the financial statements and footnotes, and assisted the client with auditor questions throughout the audit.