Cryptocurrency accounting in 2024

The Financial Accounting Standards Board (FASB) recently issued a significant update to the accounting standards for cryptocurrency assets, known as ASC 350-60. This update aims to clarify guidance on accounting for and disclosing crypto assets.

The International Financial Reporting Standards (IFRS) has had cryptocurrency on its agenda for some time. However, many consider that it is still too early for any codification changes and prefer that the evolving market practices be monitored for a longer period.

By examining companies’ annual reports, we can observe significant differences. Often, the economic reality is completely obscured. Unification in this area would benefit investors and enhance financial market transparency.

Accounting standards used to account for cryptocurrency

Before ASU 350-60, crypto companies treated crypto assets under US GAAP as indefinite-lived tangible assets that couldn’t be amortized. If they fell below the carrying amount, they were written down to fair value, with no option to adjust upwards if values increased later.

ASU 350-60 aims to provide more accurate and helpful information for investors and stakeholders by reflecting the actual economic realities of crypto assets. It requires entities to measure crypto assets at fair value each reporting period, with changes recognized in net income.  Adoption is mandatory from next year, but the impact of this codification can already be seen by observing the first adopters.

The IFRS aims to achieve the same goal, but there is currently no specific guidance. In an interesting article [2], a conceptual analysis of IFRS accounting theory reveals the most suitable approach to accounting for cryptocurrency.

“It was found that cryptocurrencies meet the definition and recognition criteria of an asset in terms of the conceptual framework. The economic phenomenon of the transaction indicates that an entity holding an investment in cryptocurrencies can have one of two intentions, namely, either to sell the cryptocurrencies over the short term, where cryptocurrencies are held for trading, or to sell the cryptocurrencies over the long term where the cryptocurrencies are held for capital growth. Given the volatile nature of cryptocurrencies, the current value measurement basis will best represent the true value of the cryptocurrencies on the measurement date, whether the cryptocurrencies are held for trading or for capital growth”.

This study did not include mining companies due to their specific and more complex scenarios. However, for other companies using cryptocurrency in their business, the IFRS concepts are, unsurprisingly, similar to the new ASC guidance and align with common sense.

Let’s look at some examples of accounting for cryptocurrency and its impact.

In its 2023 annual report, the mining company Marathon Digital Holdings, Inc. (MARA) reported a $331 million revaluation of its digital assets at fair value. This amount is nearly equivalent to the company’s revenue. Net income was $261 million in 2023, but after adjusting for non-recurring cryptocurrency revaluation, it would be a loss of $70 million. The profit margin, initially reported at 57%, would be -29% after adjustment. The positive reported outcome, without adjustment, could significantly influence the stock price. We observed price appreciation in the first quarter of 2024 when the annual report was finalized, indicating a possible correlation.

Another example is Coinbase (COIN), a company heavily investing in cryptocurrency. Its revenue surged to $1.6 billion, a 72% increase from the previous quarter, with net income reaching $1.2 billion. Coinbase to report an additional $650 million in gains, significantly impacting net income and earnings per share. [4]. Although this is only an interim report, we can expect a similar substantial effect on financial ratios as Marathon.

MicroStrategy (MSTR0 is another significant holder of cryptocurrencies. The company will adopt the new standard next year, but already shared in its 2023 annual report that if it adopts this guidance in 2024, its beginning retained earnings balance would increase by approximately $3.1 billion. This nearly doubles the current digital asset value on its balance sheet, significantly impacting subsequent financial ratios.

Tesla (TSLA), another major cryptocurrency investor, acknowledged the need to revalue its cryptocurrency holdings in its next annual report but did not provide any estimates. Interestingly, most top companies in the S&P index (AAPL, MSFT, AMZN, ORCL, META, LLY) do not record any investments in digital assets.

Cryptocurrency accounting standards

The revaluation effect is expected to be significant for all companies with substantial digital assets on their balance sheets, as many have held these assets at initial value minus impairment. This valuation generally differs from fair value due to the constantly rising cryptocurrency prices.

The differences between IFRS and GAAP accounting rules add complexity, making the situation challenging for investors. They will need to monitor all adjusted indicators carefully to understand the impact of non-recurring revaluation. As companies adopt this standard throughout 2024 and 2025, comparisons will be difficult.

Unifying cryptocurrency accounting standards across companies would greatly benefit businesses, investors, and financial markets. The most appropriate method is to use a new asset category and the fair value approach. Depending on the company’s operations, either operating or investing cash flows should describe cryptocurrency transactions.

Currently, all companies under IFRS and GAAP have options to report accurately. However, many annual reports still do not reflect economic reality. ASC 350-60 will help address this issue, and we can expect significant adjustments in 2025 annual reports for many companies.

In IFRS annual reports, we may still see some conceptual differences, but hopefully, companies will align with the GAAP proposal and adopt the fair value approach.

What is cryptocurrency?

Cryptocurrency is a digital currency designed for use over the internet and is not backed by a central authority, such as a bank or government. It is traded between consenting parties on a decentralized network. Transactions are recorded on a digital ledger, which uses cryptography to secure transaction records, control the creation of new issues, and verify ownership transfers.

Cryptocurrencies may be used as payment methods or investments. They are not considered traditional currencies and different jurisdictions treat them differently.

Cryptocurrencies can be obtained by purchasing from an exchange, mining, or as a reward for work on a blockchain. They are often volatile, and their value depends on the market price.

References:

1. Financial reporting for cryptocurrency
2. Nicolette Klopper and Sophia Magaretha Brink, 2023. “Determining the Appropriate Accounting Treatment of Cryptocurrencies Based on Accounting Theory,” JRFM, MDPI, vol. 16 (9), pages 1–16, August.
3. Financial reports of companies taken at annualreports.com webpage
4. Coinbase’s Early Adoption of FASB Guidelines: What Finance Operators Need to Know