In one of our other blog posts, we mentioned that digital assets are accounted for as indefinite-lived intangible assets. As such, they are subject to impairment. This article briefly covers the impairment assessment process for intangible assets.
Per ASC 350-30-35-18A, “An intangible asset that is not subject to amortization shall be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired.” The guidance provides events and circumstances that should be considered when evaluating the indefinite-lived intangible assets for impairment (ASC 350-30-35-18B):
- Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on future expected earnings and cash flows that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset.
- Financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset.
- Legal, regulatory, contractual, political, business, or other factors, including asset-specific factors that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset.
- Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset.
- Industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (in both absolute terms and relative to peers), or a change in the market for an entity’s products or services due to the effects of obsolescence, demand, competition, or other economic factors (such as the stability of the industry, known technological advances, legislative action that results in an uncertain or changing business environment, and expected changes in distribution channels) that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset.
- Macroeconomic conditions such as deterioration in general economic conditions, limitations on accession capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset.
The guidance indicates other factors should be considered as well (ASC 350-30-35-18C):
- Positive and mitigating events and circumstances that could affect the significant inputs used to determine the fair value of the indefinite-lived intangible asset.
- If an entity has made a recent fair value calculation for an indefinite-lived intangible asset, the difference between that fair value and the then carrying amount.
- Whether there have been any changes to the carrying amount of the indefinite-lived intangible asset.
The key factor to consider is within ASC 350-30-35-18C (b) as prices for cryptocurrencies are generally available on exchanges on a daily basis.
When performing the impairment assessment, the last traded price on the day of the assessment (i.e. December 31 for calendar year-end companies) would be obtained from a reputable exchange and compared to the historical cost basis of each cryptocurrency tranche. A tranche is essentially considered to be each cryptocurrency transaction. If the fair value (i.e. price from the exchange) of the cryptocurrency is below the historical cost basis of the tranche, the tranche should be written down to fair value. See below for an example:
Tranche 1: 1 Bitcoin received @ $25,000
Tranche 2: 1 Bitcoin received @ $32,500
Price @ 12/31 of Bitcoin is $26,000
For the impairment assessment, as the price of Bitcoin at 12/31 is higher than Tranche 1, no impairment is necessary. As the price of Bitcoin at 12/31 is lower than Tranche 2, an impairment would be necessary and the following entry would be recorded:
Dr. Impairment Expense $6,500
Cr. Bitcoin $6,500
Note that once impairment occurs, it can never be reversed. For instance, if the price of Bitcoin rose to $40,000 at the next impairment assessment date, Tranche 2 could not be written back up to $32,500.