Financial Reporting

In 2021, Tesla Inc. invested $1.5 billion into bitcoin, only to exchange 75% of it for fiat currency a year later.  Whether cryptocurrency is a good investment for your business is a question only time can answer. But one thing is for certain: you need to know how to account for it. Whether you accept crypto as payment, buy and sell crypto as a core part of your operations or simply use crypto as a way to store value, crypto is different and more complicated than cash. In this guide, you’ll learn what makes crypto unique, why it’s not a cash equivalent, how different types of businesses should record crypto assets differently on their balance sheets, and how the type of asset can impact your income statements and your bottom line. 💡Key Takeaways: While cryptocurrency shares some similarities with cash, it is not a cash equivalent. The way you record crypto as an asset depends on your business model. Most companies should record crypto as an intangible asset, but some companies record crypto as an investment or inventory. Cryptocurrency has its benefits, but one downside is that most businesses can only recognize losses on crypto until they sell it.                                                                                                              Source: YouTube What Is Different About Crypto? Although many people use cryptocurrency as a form of digital money—and despite having “currency” in its name—cryptocurrency is not cash or a cash equivalent. While some companies accept crypto as payment, your digital assets have more in common with investments such as stocks and bonds, and less in common with cash equivalents such as treasury bills or certificates of deposit. To help make this distinction clear, the International Accounting Standard has a clear definition of cash equivalents that excludes cryptocurrency: “short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value.” As such, your financial reports can’t account for crypto assets as if they were just another form of currency or cash equivalent. The way you account for crypto assets should change based on your business model. Another significant difference between crypto and cash is that crypto is not issued by a government and isn’t regulated by any institution. That means that unlike a fiat currency, the government does not designate crypto as legal tender and crypto losses or theft are not protected by the FDIC.                                                                                                    Source: Fidelity.com Crypto on the Balance Sheet Since cryptocurrency is not cash or a cash equivalent, you must account for crypto differently than other types of currency. While the logic is straightforward, the way you account for crypto on the balance sheet depends on your industry. 1. Non-Crypto Companies For most businesses that neither invest in crypto as a core part of their operations nor mine, buy or sell crypto in the ordinary course of business, crypto is an intangible asset. While the company may intend to eventually sell crypto, since it is not a fiat currency, cryptocurrencies don’t have any tangible value until they are sold. In other words, unlike a financial instrument such as a certificate of deposit, cryptocurrency has no value until somebody buys it. Since crypto has no tangible value, you should account for it on the balance sheet as an intangible asset. This means that you should document crypto at its purchase price, and not as its fair market value. In the section on Income Statement below, we’ll explore how you should record changes to the market value of your crypto. 2. Financial Firms For a financial firm, crypto is a little bit different than it is for the average company. Rather than simply being an intangible asset, financial firms should account for crypto as an investment. While this may seem contradictory, the logic is simple: for most companies, crypto is simply another type of asset. For a financial firm, crypto is a component of its core business. Since the role of crypto within a financial firm is to generate income, you should record crypto as an investment on your balance sheet. This means that unlike an intangible asset, you should record crypto at its fair value, separate from its purchase price. 3. Crypto Miners For crypto miners—companies who mine and sell crypto in the ordinary course of business—you should record crypto on the balance sheet as inventory. While crypto doesn’t have a physical form, the International Accounting Standard allows you to record crypto as inventory if your company’s business model involves mining, buying or selling crypto during the ordinary course of business. In this case, you should record crypto at the lower of the cost and net realizable value.                                                                                       Source: The Motley Fool Crypto on the Income Statement Just as companies can record crypto on their balance sheet in different ways based on their business model, the way you record crypto as an asset has implications for revenue planning and reporting as well. 1. Non-Crypto Companies The biggest downside to accounting for crypto as an intangible asset is that you can record impairment, but not unrealized gain. What this means in practical terms is that until you sell your crypto, its value can only go down, but never up. If your company purchases $100,000 of a cryptocurrency, you would account for it as an intangible asset worth $100,000 on the balance sheet. If after a period of time, the price of that cryptocurrency had fallen by 40%, you could record the $40,000 impairment, revaluing your intangible asset at $60,000. However, if the value of the cryptocurrency had doubled, you could not revalue your intangible asset to reflect the $200,000 you might sell it for on the market because until you’ve sold it, this gain is entirely unrealized. In short: most companies’ cryptocurrency values can only decrease and never increase until they actually sell the crypto and realize a net gain. 2. Financial Firms For companies investing in crypto as a core part of their business, the investment asset gives them more flexibility on the income statement. You should record crypto, like other forms of investment, at its fair value. This means that financial firms can report the income or expense generated from their cryptocurrency, whether it’s been realized or not, and whether it’s a net loss or gain. 3. Crypto Miners As a crypto miner, you want to record crypto as an inventory asset at the lower end of the cost or net realizable value. What that means for your income statement is that you can record unrealized loss (if the net realizable value goes down), but not unrealized gain. Once you realize a gain by selling the coins or tokens, then you can report it as income, but until then, you can’t report an unrealized gain on your income statement. Crypto Versus Cash After so many years, experts agree that crypto is here to stay. As more and more high-profile companies become invested in crypto, it’s important that you understand how to account for crypto as an asset and how that impacts your other financial statements. All You Need To Know About Crypto Asset Accounting Does your future include crypto? Plan for it with Vena.