Foodies love their fads and crazes: Kobe beef, bluefin tuna sashimi, even the seasonal pumpkin spice latte. But truffles are one foodie craze that has persisted over time. Prized by chefs and gourmands, truffles add what some consider a spectacular touch to many dishes. Truffles are a rare, spontaneous fungus that can’t be cultivated. Because they’re hard to find, they require a skilled human-pig hunting partnership to locate. As with other things rare and prized, their price can vary wildly. Varieties range from $300 to $800 per pound, and the treasured white truffle can cost $4,500 per pound–or even more. In November 2021, for example, a two-pound white truffle sold at auction for nearly $118,000.

Some fads and crazes persist. Others? Not so much, which brings us to the focus of this article: digital assets. To persist or not to persist–that is the question. Knowing what digital assets are, what they’re worth, and how to account for them is critical for today’s accounting professionals.

What’s a digital asset?

That question is not as easy to answer as you might initially think. It’s like asking, “What’s a truffle?” Just as there are different types of truffles, the same holds true with digital assets. Examples include:

• Crypto assets. These types of digital assets are sort of like a digital currency. Common examples include bitcoin and ether. Although people might hold these types of digital assets as a form of investment, they also are often used as a medium of exchange–that is, a business or individual might accept bitcoin as a form of payment for a good or service.

   

• Non-fungible tokens (NFTs). The key to understanding this type of digital asset is in the name – “non-fungible.” Unlike other digital assets that are fungible (for example, no bitcoin differs from another), an NFT is unique or different from all other NFTs. One example of an NFT is Beeple’s ”Everydays: The First 5000 Days,” a form of digital art that recently sold for more than $69 million.

   

• Stablecoins. Thanks to the folks labeling digital assets, just like the others, the key to understanding stablecoins is in the name. Not surprisingly, the value of a digital asset can be highly volatile. Just note the price swings in bitcoin over the past few years. Stablecoins are a form of digital asset that is meant to be more stable in value than the average digital asset. The creators of these stablecoins use various means to stabilize the price. One way of stabilizing the price is by setting the value of the coin equal to a fixed amount of another asset; for example, one unit of a stablecoin might be set to equal one U.S. dollar. However, buyer beware: Not all stablecoins live up to their name.

   

• Virtual currencies. A currency within a specific virtual ecosystem like a video game might be one of the oldest forms of digital assets. Those who play video games are well acquainted with virtual currencies that can be used to purchase merchandise or other premium features within the game. 
  

Aside from examples of digital assets, an actual definition also is quite useful. According to the Securities and Exchange Commission (SEC), a digital asset is “an asset that is issued and transferred using distributed ledger or blockchain technology, including, but not limited to, so-called ‘virtual currencies,’ ‘coins,’ and ‘tokens’.”

How do you account for digital assets under U.S. GAAP?

Let’s start with addressing the elephant in the room: In general, accountants are hard-pressed to find any specific guidance on digital assets in U.S. GAAP. This really shouldn’t come as a surprise given how new these assets are. Fortunately, there’s good news. In May 2022, the Financial Accounting Standards Board (FASB) added a standard-setting project to its agenda to address the accounting for and disclosure of “certain digital assets.” The FASB’s actions come on the heels of comments received on its June 2021 “Invitation to Comment–Agenda Consultation” document, in which a large majority of respondents asked the FASB to look into the accounting for digital assets.

For now, accountants are without any formal guidance from the FASB that explicitly addresses core accounting issues (e.g., recognition, measurement, derecognition, presentation, disclosure) for digital assets. While welcome, the recent guidance issued by SEC staff on the safeguarding of digital assets covers only a fairly narrow issue.

Although accountants might not have any explicit authoritative guidance from the FASB right now, the American Institute of CPAs (AICPA) has done quite a bit of legwork navigating the thousands of printed pages of guidance within the FASB’s Accounting Standards Codification to settle on accounting guidance (nonauthoritative) transactions involving digital assets. The AICPA’s published guidance and practice aid can be located here. (Note that registration is required.)

While not all-encompassing, the AICPA’s practice aid addresses important questions such as:

• How should I account for an acquired crypto asset such as bitcoin or ether?
• How should I account for a crypto asset received from a revenue transaction?
• What are the subsequent measurement considerations for holdings of crypto assets?
• How do I determine the fair value of a crypto asset?
• How should I account for a lending transaction involving crypto assets?
• How do I account for digital mining activities?
• What about investment companies and broker-dealers? How do they account for investments in digital assets?
  

Why have so many people asked FASB to undertake a project on the accounting for digital assets?

That’s an excellent question. The simplest answer is that not everyone loves the accounting conclusions we are currently reaching. Consider these two hypotheticals:

Hypothetical 1: Bitcoin as intangible asset

Future Co. is all about being forward-thinking, identifying and focusing on the next big thing. It clearly sees the power and potential of blockchain technology, so it put its money where its mouth is and invests $10 million in bitcoin. All is well until the accountant announces that the company is not allowed to account for bitcoin at fair value. Bitcoin isn’t a tangible asset, and it isn’t a financial asset (at least according to U.S. GAAP). So it must be accounted for as an intangible asset. And guess what that means? That’s right: Cost basis subject to impairment testing, with no write-ups for increases in value and write-downs any time the fair value of bitcoin goes below its current cost basis.

Hypothetical 2: Future receipt of bitcoin as form of payment

FutureWarehouse accepts bitcoin as a form of payment for orders of its futuristic widgets. One of its customers, SpaceCorp, orders 100 futuristic widgets in exchange for 10 bitcoin to be paid 30 days from the contract date. FutureWarehouse provides SpaceCorp the 100 widgets at the transaction date, books revenue, and then records a receivable equal to the fair value of the bitcoin as of the contract inception date. Then the accountant announces that the company might need to record an embedded derivative, stemming from its future receipt of bitcoin whose value might change. The CFO isn’t too thrilled when she learns changes in the value of the derivative will cause unexpected volatility in the company’s earnings figure.

So, how might the FASB’s project help?

Although it’s too early to determine the ultimate outcome of the FASB’s project. one can speculate on what the main focus areas might be:

• Subsequent measurement. Should holdings of digital assets be measured at fair value?
• Derecognition. Which model should an entity use to determine if transferred digital assets should be derecognized from its balance sheet?
• Disclosure. If digital assets are measured at something other than fair value, should the fair value of digital assets still be disclosed in the notes?
  

Entities should stay tuned to FASB proceedings to learn more about where the project ultimately heads.

What now?

The use of and use cases for digital assets and the underlying blockchain technology is expanding daily, which continues to put pressure on the existing accounting frameworks used to account for the various use cases.

What can you do? Stay informed on developments through the NYSSCPA. Get educated by reading the AICPA’s practice aid. And if you are really feeling ambitious, reach out to the FASB and ask for improved guidance.

Where can I go for more?

Estate Planning with Digital Assets

International Tax Implications for Digital Assets

The Unclear Status of Decentralized Finance (DeFi) Transactions

Department of Labor Position on Cryptocurrency Investment in 401 (k) Plans

Pragmatic Realities of Bitcoin and Crypto-Investing

Sean C. Prince, CPA, is a partner in the national office at Crowe who specializes in accounting consultations. Sean has more than 13 years of experience consulting with audit engagement teams and clients on the interpretation and application of complex accounting guidance, including the accounting for digital assets, revenue recognition, lease accounting, accounting for financial instruments, and derivatives and hedging. Sean also serves as the lead subject-matter specialist on revenue recognition at Crowe. In addition, Sean currently is chair of the NYSSCPA’s Financial Accounting Standards Committee.