Financial reporting for cryptocurrency

Abstract

This study compares and contrasts US and international accounting and financial reporting practices for cryptocurrency. We analyze the financial statements of 40 global companies that have exposure to cryptocurrencies, including cryptocurrency purchases, mining, payments, trading, and investments in ICOs and early-stage blockchain ventures. We document inconsistency between Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), as well as distortions that can mislead users in assessing asset value, liquidity, profitability, and cash-generating abilities across firms. In particular, firms receiving cryptocurrencies in revenue-generating activities account for cryptocurrencies as intangibles using different measurement bases and classify the associated cash inflows differently. Some firms place cryptocurrencies in the usual long-term location of intangibles, while others consider intangibles as liquid, short-term assets. Limited guidance about crypto-assets from both IFRS and GAAP lets companies choose which existing standard to apply and how to apply it. Understanding the financial and valuation implications of these new virtual assets is vital for future accounting research and professional practice.

Accounting For Digital Assets

“…To the extent that the purpose of holding digital assets is a part of the operating activities of a firm, and where fair values are available in a liquid market, it would appear that applying FVPL would lead to a more accurate measure of the operating results of the firm allowing for better decision making. Where firms are largely holding digital assets, particularly cryptocurrencies, as a liquid alternative to cash (Luo and Yu 2022) the treatment of unrealised gains and losses through profit and loss would be consistent with anecdotal evidence for FVPL to be the preferred recognition, especially where there are liquid markets that allow for fair value measurements to be readily available (Anderson et al. 2022).…”

“…Luo and Yu (2022) present the example of Tesla which, consistent with US GAAP, reports its holdings of cryptocurrencies as an indefinite‐life intangible asset, even though the purpose of holding these are as a liquid alternative to cash. Since cryptocurrencies are trading at highly volatile prices, with 40% price swings possible in one day (Luo and Yu 2022), under US GAAP it is inevitable that impairment losses will be required to be reported. Under IFRS, the effect is not as severe if firms elect to use a revaluation model with upwards movements being able to be recognised.…”

“…In accordance with IAS21 – The Effects of Changes in Foreign Exchange Rates – transactions would need to be translated from the cryptocurrency to the functional currency. However, under such treatment, timely and reliable valuation can be made difficult given the volatility observed in this market (Luo and Yu 2022).…”

“…The treatment of cryptocurrencies as an intangible asset may not fairly present a company's liquidity position (Luo and Yu 2022). Luo and Yu (2022) present the example of Tesla which, consistent with US GAAP, reports its holdings of cryptocurrencies as an indefinite‐life intangible asset, even though the purpose of holding these are as a liquid alternative to cash.…”

“…The treatment of cryptocurrencies as an intangible asset may not fairly present a company's liquidity position (Luo and Yu 2022). Luo and Yu (2022) present the example of Tesla which, consistent with US GAAP, reports its holdings of cryptocurrencies as an indefinite‐life intangible asset, even though the purpose of holding these are as a liquid alternative to cash. Since cryptocurrencies are trading at highly volatile prices, with 40% price swings possible in one day (Luo and Yu 2022), under US GAAP it is inevitable that impairment losses will be required to be reported.…”