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An investor’s guide to accounting for cryptocurrencies

Published on November 24, 2023 by Salinda Perera

Neither IFRS nor US GAAP has specific guidance on accounting for cryptocurrencies. As a result, current  guidelines are applied and investment in cryptocurrencies is accounted for as an indefinite-life intangible asset. Due to the absence of a fair-value option under US GAAP, crypto investments are reported at cost less impairment. This could result in a significant difference between the value reported in the financial statement and the actual market value of the respective cryptocurrency given that cryptocurrency market prices can be volatile. It would also make the reporting of investments in cryptocurrencies in US GAAP[i]-compliant financial statements incomparable with those following IFRS.

In this blog, we summarise how investment in cryptocurrencies is currently accounted for under IFRS and US GAAP.

What characteristics of cryptocurrencies are important for accounting?

“Cryptocurrencies are digital tokens or coins based on blockchain technology, such as Bitcoin. They currently operate independently of a central bank and are intended to function as a medium of exchange” and “derive their value based on supply and demand” – PwC

Is there accounting guidance for cryptocurrencies?

There is currently no specific formal guidance under IFRS or US GAAP.

How is investment in cryptocurrencies accounted for under current guidance?

Investment in cryptocurrencies is accounted for as an indefinite-life intangible asset under both IFRS and US GAAP, as – in most instances – it does not meet the definitions of other asset classes such as cash and cash equivalents, financial instruments or inventories.

  • Companies following IFRS have the option of accounting for crypto assets at cost less impairment or fair value less impairment (revaluation model) under IAS 38

  • Companies following US GAAP need to carry crypto assets at cost, as US GAAP does not have a revaluation model for intangible assets

When can we expect a fair-value option for accounting for cryptocurrencies under US GAAP?

The FASB (US GAAP) issued an exposure draft in March 2023 and looks to add a fair-value option for accounting for crypto assets that are classified as indefinite-life intangible assets. The final accounting standard update is currently being drafted.

How does US GAAP guidance on accounting for indefinite-life intangible assets differ from IFRS?

  Cost Fair value
  IFRS US GAAP IFRS US GAAP (proposed)
Classified as Intangible assets (IAS 38) Intangible assets (ASC 350) Intangible assets (IAS 38) Intangible assets (ASC 350)
Accounting        
Carried at Cost less impairment losses Cost less impairment losses Fair value less impairment losses Fair value
Increase in market value n/a n/a OCI (unless it reverses a revaluation loss previously recognised in the P&L for the same asset) P&L
Decrease in market value n/a n/a Profit or loss (OCI to the extent of a revaluation surplus in OCI) P&L
Impairment P&L (impairment) P&L (impairment) P&L (impairment) n/a
Subsequent recovery of fair value after impairment Reversed Not reversed (any subsequent gain will be realised at disposal) Reversed n/a
Companies following the method   MicroStrategy Incorporated, Marathon Digital Holdings, Inc. Hut 8 Mining Corp. n/a

Source: IAS 38 – 2021 Issued IFRS Standards (Part A), IAS 36 – 2021 Issued IFRS Standards (Part A), Impairment of Non-Financial Assets | GAAP Dynamics, Intangibles – goodwill and other, Prop ASU – Intangibles – Goodwill and Other – Crypto Assets (Subtopic 350-60) – Accounting for and Disclosure of Crypto Assets (fasb.org)

How does the difference in current guidance impact financial statements (IFRS vs US GAAP)?

IFRS (fair-value option) US GAAP
Increase in fair value
 Total assets Increase No change
 Equity (OCI) Increase No change
 Net income Increase if the increase offsets a previous impairment loss No change
Decrease in fair value
 Total assets Decrease No change
 Equity Decrease (to the extent that the loss offsets any revaluation reserve) No change
 Net income Decrease No change
Impairment
 Total assets Decrease Decrease
 Net income Decrease Decrease
Reversal of impairment
 Total assets Increase No change (not permitted)
 Net income Increase No change (not permitted)

Source: IAS 38 – 2021 Issued IFRS Standards (Part A), IAS 36 – 2021 Issued IFRS Standards (Part A), Impairment of Non-Financial Assets | GAAP Dynamics, Intangibles — goodwill and other

How may management use the current accounting choices to manage performance or financial position? How much judgment can be exercised when accounting for cryptocurrencies currently?

There aren’t many choices currently for accounting for cryptocurrencies. IFRS users need to choose between a cost-less-impairment model and revaluation model; US GAAP users need to use a cost-less-impairment model.

What should investors watch for in a company that has sizeable investments in cryptocurrencies?

  • For companies that use the fair-value model, net earnings measures will likely be far more volatile than for comparable companies without crypto investments on their balance sheets. Hence, the potential for “negative earnings surprises may also tend to be higher”.

  • For companies that use the cost-less-impairment model, investors may find the carrying value to be significantly lower than the realisable market value. Sale of crypto assets and the recognition of the related gain may be used to prop up earnings numbers in periods of stress.

  • Peer comparisons of key financial ratios such as return on assets and asset turnover may need to be adjusted to account for the impact of crypto assets.

  • Finally, the higher volatility of crypto assets means that even for companies that adopt the fair- value model, the time lag between the balance sheet date and the date on which the financial statements are published may be significant, i.e., there could be a substantial decrease or increase in value. This should ideally be disclosed in the footnotes to the financial statements.

Appendix 1:

Companies with investments in cryptocurrencies

Company name Accounting standard followed Cryptocurrencies accounted for as Reported at
MicroStrategy US GAAP Intangible assets Cost less impairment Form 10-K – 16 Feb 2023 (microstrategy.com)
Tesla US GAAP Intangible assets Cost less impairment 10-K (sec.gov)
Square US GAAP Intangible assets Cost less impairment 0001628280-23-004840 (d18rn0p25nwr6d.cloudfront.net)
Marathon Digital US GAAP Intangible assets Cost less impairment 10-K - 03/16/2023 – Marathon Digital Holdings (marathondh.com)
Coinbase US GAAP Intangible assets Cost less impairment 0001679788-23-000031 (d18rn0p25nwr6d.cloudfront.net)
Mercado Libre US GAAP Intangible assets Cost less impairment Form 10-K for Mercadolibre INC filed 02/24/2023
Hut 8 Mining IFRS Intangible assets Fair value Hut-8-FS-Q4-2022-FINAL.pdf (hut8.io)

How Acuity Knowledge Partners can help

Forensic analysis has emerged as a very useful niche tool for investors. The role of forensic analysis differs based on whether an investor is bullish or bearish. For bearish investors, forensic analysis is important because accounting-related anomalies can be a strong catalyst for short positions. For bullish investors, forensic analysis provides an important layer of investment validation. It analyses whether a company’s historical results are sustainable and support projected results, or whether these results are tainted by factors such as questionable accounting. It also analyses companies’ strategic and operating choices.

Our Forensic Analysis team helps clients navigate complex accounting treatment in financial statements and its impact on earnings and the balance sheet.

Our team of forensic analysts have more than 10 years of experience in catering to this niche market, with hands-on experience in dealing with securities in diverse geographies and sectors.

Sources:


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About the Author

Salinda had been a part of Acuity Knowledge Partners’ (Acuity’s) Forensic Analysis team for 7 years and has 11 years of total work experience. He is experienced in providing forensic support and quality-control support on deliverables of team members and preparing accounting diagnostic reports on a number of sectors, including banking, energy and technology. Prior to joining Acuity, he worked as an assistant manager at Ernst & Young, where he was responsible for leading a team in financial statement audits of companies in different sectors, including banking, manufacturing and trading. He is an Associate Member of the Institute of Chartered Accountants of Sri Lanka and a Level III candidate in..Show More

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