Accounting for Bitcoin Digital Assets – Bitcoin Magazine
This is an opinion piece by Matt Maraia, a CPA who wants to help educate the Bitcoin community about the ever-changing accounting standards regulations.
As the evolving digital asset ecosystem continues to raise more questions than answers in the accounting sector, members of the Financial Accounting Standards Board (“FASB”) delivered some groundbreaking news. On May 11, 2022, the FASB voted to hold future discussions on the current dilemma presented by corporate cryptocurrency investments, signaling a potential overhaul of current accounting guidance for digital assets.
This action was spawned by recent developments in corporate willingness to put cryptocurrencies, primarily bitcoin, on their balance sheets. Most notably, publicly traded giant MicroStrategy (NASDAQ: MSTR ), which has a market capitalization of $2.7 billion, bought over $250 million worth of bitcoin at the end of 2020 and more than doubled down on that position throughout 2021 and 2022. Others have since followed the same trend and have been instructed by many boards and auditors alike to account for their newfound, yet continuously volatile assets under the framework of Accounting Standards Codification (“ASC”) Section 350. An uncertainty immediately followed as organizations considered whether accounting for purchased digital assets under the umbrella of indefinite-lived intangibles properly valued this emerging asset class.
Companies were—and still are—encouraged to account for these inventories under ASC 350 at cost, subject to impairment, while neglecting subsequent increases in fair value. Simply put, organizations were guided to account for these assets at their purchase price on the balance sheet, while only a decline in value below the original cost of the inventory should be recorded as a loss on the income statement! Conversely, price and value increases were to be ignored on both the balance sheet and profit and loss account. No wonder public companies are hesitant to touch bitcoin or digital assets. This issue continues to persist, but a possible key shift in accounting treatment may be in the works subject to FASB vote.
Agreed discussions will begin to question the existing methods of recognition, measurement, presentation and disclosure. Many hope that this will lead to the adoption of ASC 820, pointing to fair value measurement guidance as a more relevant alternative to ASC 350. It remains unclear exactly how ASC 820 will affect the accounting for holdings of digital assets. However, the general concept suggests that a price increase will be accounted for in the balance sheet at the current market value based on the date of the relevant financial reporting period. Furthermore, companies will begin to see benefits on the income statement when an increase in the price of their holdings exceeds the purchase price, which represents a gain (increase in net income).
During the calendar year, we saw bitcoin, the most valuable digital asset in the ecosystem, plunge from approximately $47,000 per token on January 1, 2022 to below $20,000 per token on June 30, 2022, for a 56% decline relative to this. period. Given the highly volatile market in which bitcoin operates, does today’s accounting method provide an accurate picture of a company’s balance sheet? Does the current guidance give investors the right tools to make smart buying decisions? These are the questions the FASB seeks to address.
Stay tuned – change is inevitable. Institutional adoption of digital assets may be much closer than it seems.
This is a guest post by Matt Maraia. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
