It’s no secret that the United States is in the midst of a digital transformation – that’s easy to see with the growing popularity of cryptocurrencies and digital assets, as evidenced by the huge growth in 2019 that’s expected to surge again in 2020.
Much of the criticism surrounding cryptocurrencies relates to its value being too based in speculation. Despite this criticism we’ve seen business legitimize its presence; with more than 100,000 companies identifying themselves as willing to accept bitcoin for payment, and 61% of digital companies worldwide investing in blockchain. This technology is changing the landscape of finance globally, and with this change comes a newfound importance in digital knowledge within the accounting profession and financial services.
And really, this evolving area affects all avenues of the accounting profession, from financial statement preparers to auditors and all of those in between. But thankfully the AICPA has released their first practice aid, Accounting for and Auditing of Digital Assets, with the purpose of providing guidance on how to account for digital assets and virtual currencies, such as Bitcoin.
But before we jump into what the practice aid suggests, what actually is Bitcoin?
Bitcoin is one type of cryptocurrency – which at its core means that it is literally an online, fully digital, or virtual currency derived from blockchain technology. You then store your cryptocurrency in a third-party hosted wallet service that is also online or in what is called a cold storage wallet that is not accessible over the internet.
Why are people leaning towards virtual currencies?
That’s answered best, and most simply, by explaining how cryptocurrency got its name.
This kind of virtual currency uses encryption to verify transactions – essentially locking your data and digital records safely away. But not only that, the underlying blockchain technology also allows for yet another level of protection guaranteeing the user’s security – this tends to be the pull to dive into cryptocurrencies.
So, back to the practice aid.
This first version focuses on what Bitcoin and other crypto-assets mean for financial reporting, and the accounting standards that go hand-in-hand with blockchain technology. And with the speed that digital assets are changing the industry, the AICPA is already working on guidance specifically for auditing of digital assets that will be released as a second version of this practice aid.
But for now, we know that a lot of you have accounting questions, so we’ve summarized the key takeaways from the financial reporting practice aid for you below.
Classification: indefinite-lived intangible asset
Digital assets not subject to industry-specific guidance shall be classified as indefinite-lived intangible assets other than goodwill. They should not be recognized as cash, marketable securities, or inventory.
Initial measurement: fair value
Digital assets purchased with cash should be recorded at their cost at the date of purchase. For digital assets received as consideration, the asset should be measured at its fair value on the transaction date.
Subsequent measurement: cost subject to impairment testing
Indefinite-live intangible assets are not subject to amortization. Instead they are subject to at least annual impairment testing. The same methodology applies to digital assets and cryptocurrencies. If it is determined that it is more likely than not that the fair value of the assets are less than their carrying value, the assets must be written down to their fair value and a loss is recognized in net income. More than temporary increases in fair value are not recorded or recognized. Despite frequent changes in the fair value of digital assets, subsequent reversals of previously recognized losses is not allowed. Alongside that, evidence of the fair value declining below carrying value in the middle of a reporting period requires impairment recognition, even if the asset subsequently recovers by the end of the reporting period.
While the accounting for and measuring of digital assets is still a relatively new area in the financial reporting arena, both the AICPA and Big 4 accounting firms agree that these assets most closely resemble indefinite-lived intangibles other than goodwill, subject to impairment testing, but not gain recognition.
As the digital era continues to grow though, it’s possible that new procedures for cryptocurrencies will emerge or the existing recommendations may change. But, until then, the crypto-assets must be accounted for under present U.S. generally accepted accounting principles (GAAP).
As always, we’ll be watching out for updates and will update you if new information arises.
What does this mean for the CPA Exam?
In short, nothing … yet. The CPA Exam is yet to incorporate cryptocurrencies, but since the exam is meant to reflect current standards and practices in the accounting industry, we wouldn’t be surprised if it makes its way there in the future.
Jack Castonguay, Ph.D., CPA, serves as the Director of Accounting & License Prepatory Content. He holds a BBA in Accounting and a Master of Science in Accounting from James Madison University and received his Ph.D. in Accounting from the University of Tennessee. Jack began his career in public accounting with a Big Four accounting firm auditing manufacturing and financial services clients. He has taught financial accounting and auditing at the graduate and undergraduate levels and is currently an assistant professor at Hofstra University.