An Investor’s guide to Accounting for Cryptocurrencies

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?

CostFair value IFRSUS GAAPIFRSUS GAAP (proposed)Classified asIntangible assets (IAS 38)Intangible assets (ASC 350)Intangible assets (IAS 38)Intangible assets (ASC 350)Accounting Carried atCost less impairment lossesCost less impairment lossesFair value less impairment lossesFair valueIncrease in market valuen/an/aOCI (unless it reverses a revaluation loss previously recognised in the P&L for the same asset)P&LDecrease in market valuen/an/aProfit or loss (OCI to the extent of a revaluation surplus in OCI)P&LImpairmentP&L (impairment)P&L (impairment)P&L (impairment)n/aSubsequent recovery of fair value after impairmentReversedNot reversed (any subsequent gain will be realised at disposal)Reversedn/aCompanies 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 GAAPIncrease in fair value Total assetsIncreaseNo change Equity (OCI)IncreaseNo change Net incomeIncrease if the increase offsets a previous impairment lossNo changeDecrease in fair value Total assetsDecreaseNo change EquityDecrease (to the extent that the loss offsets any revaluation reserve)No change Net incomeDecreaseNo changeImpairment Total assetsDecreaseDecrease Net incomeDecreaseDecreaseReversal of impairment Total assetsIncreaseNo change (not permitted) Net incomeIncreaseNo 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 nameAccounting standard followedCryptocurrencies accounted for asReported atMicroStrategyUS GAAPIntangible assetsCost less impairmentForm 10-K — 16 Feb 2023 (microstrategy.com)TeslaUS GAAPIntangible assetsCost less impairment10-K (sec.gov)SquareUS GAAPIntangible assetsCost less impairment0001628280–23–004840 (d18rn0p25nwr6d.cloudfront.net)Marathon DigitalUS GAAPIntangible assetsCost less impairment10-K — 03/16/2023 — Marathon Digital Holdings (marathondh.com)CoinbaseUS GAAPIntangible assetsCost less impairment0001679788–23–000031 (d18rn0p25nwr6d.cloudfront.net)Mercado LibreUS GAAPIntangible assetsCost less impairmentForm 10-K for Mercadolibre INC filed 02/24/2023Hut 8 MiningIFRSIntangible assetsFair valueHut-8-FS-Q4–2022-FINAL.pdf (hut8.io)

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