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Accounting Guidance for Digital Currencies Appears Low on Board’s Priority List

October 12, 2018

Accounting questions about digital currency have been on the FASB’s radar since at least June 2017, when a trade group asked the board to issue guidance on how to account for increasingly common digital currency transactions. But with two AICPA panels researching whether to issue accounting and auditing guidance on the topic, the FASB appears reluctant to take formal standard-setting action.

While the FASB publicly has said it is researching accounting questions about increasingly common digital currency transactions, comments from board members suggest the board does not consider the topic a top priority.

“The AICPA’s working on it… I don’t think it’s efficient for the system to have us both doing dueling tracks,” said FASB Chairman Russell Golden on October 9, 2018, at a meeting between the FASB and the AICPA’s Private Companies Practice Section Technical Issues Committee (TIC) at FASB headquarters in Norwalk, Connecticut.

Golden was referring to the AICPA’s announcement in September that it would study whether to issue accounting and audit guidance on investments in digital currency, initial coin offerings, and digital currency transactions. The work is being done through the professional group’s Auditing Standards Board (ASB) and Financial Reporting Executive Committee (FinREC).

One member of the TIC, however, said the committee would prefer the FASB to take action.

“As a practitioner, we would prefer an authoritative GAAP level” answer, said Danielle Cheek, partner at Pannell Kerr Forster of Texas, P.C. (PKF Texas), an accounting and consulting firm in Houston. “If I have to issue GAAP financials for a client, I’d prefer to be solidly within GAAP and not to rely on nonauthoritative guidance.”

Cheek noted the rise of digital currency transactions, with Bitcoin trading volume now reaching more than $3 billion per day. On a local level, she said a large car dealership in Houston recently announced that it would accept payment in digital currency.

“I think it’s a real thing, not just a fad or a trend,” Cheek said.

Cheek said questions cropped up when one of her clients, a small trading fund, got involved in eight different digital currency exchanges and did four initial coin offerings. The client, a small private company, was only required to report tax-basis financial statements  — and Cheek said she was relieved.

“We were concerned that if they asked for U.S. GAAP or were required to provide U.S. GAAP, there’s a lack of guidance of where you go to in U.S. GAAP,” she said.

Some companies view virtual currencies as securities. For more “exotic” investments, they could be seen as derivatives, however. The currencies also could be seen as cash. In many circumstances, they could be seen as intangible assets. Cheek said she believed the answer was somewhere in between and suggested that some transactions should be reported at fair value.

“We’d love to have the board’s input on how we should account for these,” Cheek said.

FASB Vice Chairman James Kroeker suggested that he did not believe the accounting questions were as pressing as other topics on the FASB’s to-do list. Board research so far has shown that companies that accept digital currencies as payment, for example, liquidate them “within seconds of acceptance.”

“They’ve said, ‘we don’t really need it because we are realizing our value instantaneously. We’re not interested in being subjected to the volatility, whether it’s just because of unknown trading volume by unknown people or, at other end, manipulated trading activity,” Kroeker said. “They don’t want to be subject to that.”

Both Kroeker and Golden dismissed that idea that large companies liquidate digital currency immediately upon receipt because they want to avoid tough accounting questions.

“They don’t want the risk,” Golden said. “They’re like, ‘I like cash’.”

“When we asked them, is it an accounting question, they said ‘absolutely not’,” Kroeker said.

If there are businesses that do want the exposure to the volatility of digital currency value, Kroeker said he wanted to hear more about that before the FASB took action.

“Of those that want to be subject to that exposure, why is it?” he said. “I’m not going to answer that accounting question to go to a fair-value model without understanding a lot more.”

Accounting questions about digital currency have been on the FASB’s radar since at least June 2017 when the Digital Chamber of Commerce asked the FASB to issue guidance on the growing market, citing questions financial professionals have about whether digital currency should be accounted for under FASB ASC 305, Cash and Cash Equivalents, or ASC 825, Financial Instruments. Others consider ASC 350, Intangible Assets, or ASC 330, Inventory, the more appropriate accounting guidance. The conflicting views — and lack of authoritative accounting guidance — leads to auditing questions, which can turn off investors, and, hamper research and development, the business group told the FASB at the time. The FASB said it would research the issue.

Across the Atlantic, the IASB has been fielding similar questions. In July, the international board asked its IFRS Interpretations Committee (IFRIC) to tackle the topic.

The IASB at the time noted, however, that while digital currencies and blockchain technology are buzzy topics, they are not yet material issues for most public companies. The board’s staff searched English-language financial statements for public companies filed in 2017 and 2018 and found three companies in Australia disclosing that they held cryptocurrencies and one each in Bermuda, Isle of Man, Japan, Switzerland, and the UK. In Canada, however, the staff found 14 companies disclosing that they held cryptocurrencies and four disclosing that they mined as well as held cryptocurrencies.

Regardless of what the FASB decides, the AICPA’s FinRec and Auditing Standards Board will continue to research the new industry, said Dan Noll, the AICPA’s senior director of accounting standards.

“The idea is to help people think through topics and issues on both sides,” said Noll. “Where we can drill down to answers, we will.”

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