Cryptocurrency is a relatively new monetary instrument that has the potential to change the way we do business and transact currency across the globe. Often misunderstood or misvalued, it’s been at the crux of financial frauds and institutional collapses. It badly needs boundaries, categorization, and established policies for both trading and holding the currency.
If you’ve watched the news recently, several prominent banks have fallen partly due to a massive mis-valuation of crypto assets complicated by rising interest rates flanked by a sudden demand for withdrawals.
This leads to the million-dollar question.
How do we value cryptocurrencies?
Until recently, crypto was treated as a cash equivalent; however, since they are subject to significant market volatility, treating them as cash (which is much more stable, comparatively) isn’t the answer.
Nor can cryptocurrency be considered a financial “asset” for accounting purposes. Digital assets are not cash or debt securities, nor do they provide ownership interest in an entity or represent any contractual right to cash or any other asset. So don’t count crypto as one of your “assets.”
Ok, what about “intangible” assets?
These are defined as assets (apart from financial assets) that lack physical substance. These assets must be tested for impairment and must be required to write off any loss in value at the end of the reporting period. The complication with this categorization is if the crypto value increases again, its value may not be marked back up. This can cause a huge discrepancy in the representation of cryptocurrency value.
As of today, there are no hard and fast rules on cryptocurrency. However, the Financial Accounting Standards Board has recently come up with a proposal for their valuation.
In short, the proposal specifies that crypto assets be presented separately from other intangible assets on a balance sheet and that gains and losses could be recorded as net income each period. The proposal covers digital assets that:
- Do not provide the asset holder with enforceable rights to—or claims on—underlying goods or services
- Reside or are created on a distributed ledger based on blockchain technology
- Are secured through cryptography
- Are fungible
- Are not created or issued by the reporting entity and/or its related parties.
Questions on crypto?
It’s a whole new world out there when it comes to crypto! Just remember that C&B is here for you beyond tax preparation season. Think of us as a member of your financial team!