Since the emergence of digital currencies, there has been significant divergence in how to account for these instruments. There are currently several schools of thought on how these assets should appear on the financial statements of the holder.
The first is a conventional approach of literally treating digital currency, as the name implies, as currency. The rationale behind this thought is that in some organizations it is treated like a currency, much like an entity holding any currency of any country (e.g., foreign currency).
The second is another commonly applied approach that treats the digital currency assets held as investment securities or, in other words, financial instruments. In contrast to the first approach, here the holder of the assets views them much like any investment asset held.
The third and less used approach for accounting for digital currency is to account for it as inventory. In this approach, the holder carries the asset on its financial statements as an asset held for resale, much like a retailer holds assets to resell.
How is the accounting different under each of these differing approaches?
Treating digital currency like currency is much like accounting for foreign currency. Similar to the second approach of accounting for crypto as an investment or financial instrument, the asset carrying value is subjected to market value changes. There can be differences at that point though because the accounting rules for foreign currency differs, in many cases, from the rules surrounding financial instruments or investment securities, depending on intent of the holder accounting for the crypto as a financial instrument.
In the second approach, the holder needs to consider its intention on holding the digital currency. Holders of digital currency, treating it as an investment, need to determine the immediacy of selling the currency. The Financial Accounting Standards Board considers securities purchased and held principally for the purpose of selling in the near-term future to be classified as trading securities and fluctuation in market value is recorded to earnings. In contrast, if the crypto is considered held for longer term investment, some have treated this under the accounting rules for investments available for sale under which the change in market value is recorded but the offset is to the equity of the holder, not earnings. Again, in comparison, it is potentially a vastly different outcome from accounting for crypto as foreign currency.
The third approach, treating the digital asset as inventory, differs from the other two. In treating the asset as inventory held for sale, the crypto currency is recorded at cost when acquired but differs from the other two approaches depending upon the direction of change of market value. If the value of the crypto drops below the purchase value, a reduction in the carrying value is recorded to earnings. Subsequent increases in value are also recorded to earnings but only to the extent that market values don’t exceed the original purchased value.
There may be other divergent approaches used for accounting for digital currencies. So, which approach is correct?
Unfortunately, there is currently no authoritative guidance on accounting for digital currencies. The accounting professions rulemaking body, the Financial Accounting Standards Board, has not yet issued any guidance on accounting for crypto currencies. Regulatory bodies such as the Securities and Exchange Commission have not yet weighed in either. Hence, in the absence of authoritative rules, the accounting for such assets is currently at the discretion of the holders and the accounting profession using facts and circumstances as the determining factor on how to account for these digital assets. In applying any of the prior approaches, the intention of the holder appears paramount to determining the accounting approach until guidance is issued.
As examples, if the holder clearly is receiving crypto and exchanging it in the ordinary course of trade of goods and services, such as an entity importing and exporting goods and services, using the approach of treating crypto as currency or foreign currency may carry more merit than treating it as a financial instrument or inventory. On the other hand, more speculative intent might warrant the accounting for the digital coin as a financial instrument or investment. Finally, an entity in the business of acquiring crypto strictly for resale with no intent to hold for trade of goods and services or investment might find the inventory accounting approach more rational. Again, until accounting rule makers issue some guidance, the accounting for crypto assets is at the judgment of the holder.