What is the “GAAP” in Regard to Digital Currency?

By Lorenzo Prestigiacomo

As digital currencies like Bitcoin, and its competitors like Ethererum and Ripply become more common in the business world, the Financial Accounting Standards Board (FASB) is conducting early stage research into whether to develop Generally Accepted Accounting Principles (GAAP) for these currencies. In 2013, the U.S. Financial Crimes Enforcement Network (FinCEN) defined virtual currency by contrasting it against “real currency.” FinCEN stated: “regulations define currency (also referred to as “real” currency) as “the coin and paper money of the United States or of any other country that [i] is designated as legal tender and that [ii] circulates and [iii] is customarily used and accepted as a medium of exchange in the country of issuance.” In contrast to real currency, “virtual” currency is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of real currency. In particular, virtual currency does not have legal tender status in any jurisdiction.”

As far back as 2014, the Financial Accounting Standards Advisory Council (which advises the FASB on various matters) discussed virtual currencies, measurement implications, etc. However, with virtual currency use increasing, inconsistent accounting practices are becoming a more urgent problem, particularly for those entities that are publicly traded and whose transactions are material to the financial statements. The FASB plans to discuss whether to add a project to its agenda at a future public meeting.

The acceptance of digital currencies is far from universal, and is even banned in some countries. However, over 100,000 merchants accept digital currency, including major companies such as Microsoft Corporation and Overstock.com. The Federal Election Commission also ruled that digital currency is considered a campaign contribution for federal elections.

Digital currency is also held as an asset by businesses and used for investment purposes, which similarly necessitates consistent accounting guidance. Per Reuters, the FASB is considering research following a letter from the Founder and President of the Chamber of Digital Commerce (“CDC”), a trade group representing the blockchain industry, dated June 8, 2017 to the FASB to clear up accounting questions in the growing digital currency market relating to the appropriate recognition, measurement, presentation and disclosure for digital currencies. It was stated in the letter that the absence of accounting standards for currencies is a mission critical issue for companies seeking to invest and innovate in this exciting technology frontier and the lack of them may hold back economic growth in the United States.

The CDC also has launched the Digital Assets Accounting Coalition (“DAAC”) which is comprised of accounting and technology professionals representing blockchain technology companies. The DAAC is developing accounting and reporting standards for digital assets, advocating for appropriate GAAP standards, and engaging with relevant standard-setting bodies. The DAAC regularly provides input to government organizations and industry associations such as the FASB and the American Institute of CPAs on the impact blockchain-based technologies may have on the future of accounting and auditing methods.

Per the CDC, there are four distinct views on the treatment of digital currency. Some financial professionals believe digital currency should be accounted for under FASB Accounting Standards Codification (ASC):

  • ASC 305, Cash and Cash Equivalents, or
  • ASC 825, Financial Instruments, or
  • ASC 350, Intangible Assets – Goodwill and Other, or
  • ASC 330, Inventory

The conflicting treatments and lack of authoritative accounting guidance has led to confusion among auditors and/or the users of financial statements like investors and shareholders. The FASB is separately considering whether it should take on the broader issue of accounting for intangible assets, and could address digital currency within its work for that guidance.

The CDC believes the FASB should develop an accounting model that would allow businesses to recognize digital currency when they control the associated economic benefits and measure the currency at fair value, with changes recorded in income. This is similar to a position the Australian Accounting Standards Board took in December 2016 when it presented a paper to the International Accounting Standards Board’s (IASB) main advisory panel, the Accounting Standards Advisory Forum, suggesting that the IASB investigate consistent accounting for digital currency. Also, with lack of guidance in international accounting standards, digital currencies were accounted for either under IAS 2, Inventory or IAS 38, Intangible Assets. The IASB Chairman Hans Hoogervorst said that the board would follow the developments in digital currency and keep it on the watch list.

Stay tuned for future updates on the status of the FASB’s deliberations regarding adding this project to their agenda, and any proposed Accounting Standards Updates, or guidance issued thereafter.