Accounting for Cryptocurrency

Did you know MicroStrategy has $3 billion of Bitcoin?

And Tesla bought $1.5 billion of Bitcoin.
• But U.S. GAAP doesn’t currently address cryptocurrency
• So how do companies account for cryptocurrency?

Here’s what we know:

Cryptocurrencies aren’t considered cash because:
• They’re a poor store of value (too volatile)
• Not widely accepted as a medium of exchange
• Not backed by a sovereign government

Cryptocurrencies aren’t considered inventory either.
• They’re usually acquired for purposes of speculation
• But even if you purchased or mined the cryptocurrency with the intention of selling it through your ordinary course of business, it’s not “tangible personal property” so it doesn’t meet the definition of inventory per U.S. GAAP

So what are cryptocurrencies?
• They’re indefinite-lived intangible assets, accounted for under ASC 350
• Cryptocurrencies are recorded on the balance sheet at cost (whatever you paid for them)
• They’re not amortized, but are tested for impairment annually (or more frequently if circumstances suggest the asset has become impaired). The impairment is the difference between (a) the carrying value on the balance sheet and (b) the fair value

Here’s an excerpt from MicroStrategy’s 10-Q:

“The Company accounts for its digital assets as indefinite-lived intangible assets in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles—Goodwill and Other. The Company’s digital assets are initially recorded at cost. Subsequently, they are measured at cost, net of any impairment losses incurred since acquisition.”

They treat cryptocurrencies as an indefinite-lived intangible asset, measured at cost minus impairments.

But there’s a problem here, and it’s why the Wall Street Journal said cryptocurrencies could create headaches for these companies.

Companies write down the cryptocurrencies for losses, but they can’t write them up for gains.

Let’s say a company pays $2 billion to acquire cryptocurrency.
• It would initially be on the balance sheet for $2 billion
• If the fair value falls to $1.5 billion, the firm would record a $500 million impairment
• But if the fair value increases, the company doesn’t record a gain. The value could go to $8 billion and it would have no effect on the company’s earnings. The increase in value has no effect on the P&L statement unless the company sells the cryptocurrency

There is an exception to all this.
• In some situations, an investment company might be able to account for cryptocurrency as an investment and use fair value accounting
• In that case, both unrealized gains and losses would affect the company’s earnings

That’s all we know for now. Hopefully the FASB will provide clearer guidance in the future.
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