By: Andrew Brock, CPA, Senior Manager
Diversification through crypto assets, including cryptocurrency or other digital assets, in an organization’s investment portfolio, has become a more prevalent conversation, especially over the past couple of years, in light of some of the performance in these types of investments. It is a conversation that has organizations wondering if they should be exploring these assets themselves, as well as trying to answer the question of what happens if a donor wants to contribute such an asset.
Interestingly, gifts of cryptocurrency and other digital assets are still a relatively new concept and have not yet been directly addressed under U.S. GAAP (generally accepted accounting principles). However, the accounting for and disclosure of crypto assets were addressed by the Financial Accounting Standards Board (“FASB”) on October 12, 2022.
Previous Guidance on Crypto and Digital Assets
Previously, the only guidance for measuring these assets was provided by the American Institute of Certified Public Accountants (“AICPA”). The AICPA suggested given that cryptocurrency and other digital asset mediums are not considered financial assets under current guidance as they are not tied to ownership of an actual underlying asset, they would be included under the guidance of Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill and Other, which is for indefinite life intangible assets and shall be recorded as such on the financial statements. Additionally, these intangible assets will need to be considered for impairment at least annually and any future appreciation to the asset balance will not be recognized until the asset is sold. This means that under this guidance, the asset would not be included with investments measured at fair value and as such would not be adjusted based on increases in market value. It would only be adjusted for decreases (impairment) in market value. One nuance to this recognition includes if an investment company separately holds cryptocurrency as part of the investment portfolio offerings in which the guidance would then be within the scope of ASC 946, Financial Services – Investment Companies, and recorded at fair value with related investment disclosures.
New FASB Guidance on Crypto and Digital Assets
At the conclusion of the FASB board meeting on October 12, 2022, the board came to a decision that cryptocurrency and other digital assets would be measured at fair value, using the guidance of FASB Accounting Standards Codification (ASC) 820, Fair Value Measurement. As such, these assets will recognize increases and decreases in fair value in income each reporting period. Additionally, organizations will be required to recognize certain costs incurred to acquire the cryptocurrency and other digital assets, such as commission, as an expense. The board will consider presentation, disclosure, and transition at a future FASB board meeting.
Planning for Accounting Crypto and Digital Assets
As the FASB continues to explore the accounting of these assets, there are a few planning items that organizations could begin working through today in preparation, which include the following:
- Has the organization revisited its gift acceptance policy and defined whether it wants to take on such gifts at all?
- If the organization receives a gift of cryptocurrency or digital assets, would their current financial institution be able to liquidate it for them? If not, where would they be able to do this?
- Would investments in these types of assets fit into the organization’s current investment policy and if not should the diversification allocations of the policy be updated?
Answering these initial questions will at least allow an organization to be prepared when either a gift or option to invest in a crypto asset is presented. We also encourage you to reach out to your local Blue & Co., LLC advisor to help you navigate accounting for these assets.