The popularity of cryptocurrencies has increased significantly since their inception in late 2008 in the wake of the global financial crisis.

Yet, from an accounting viewpoint they never readily fit easily into a financial reporting structure. Some of this was due to interpretation, such as whether cryptocurrencies could readily be considered as cash or cash equivalent. Indeed, cryptocurrencies could not be used to pay for goods or services until quite recently.

This is no longer an accurate assessment, as shown by a recent survey carried out by Visa Inc. The survey, which queried over two thousand small businesses in nine jurisdictions including the United States, Canada, Brazil and Singapore, found about 25% were expecting to accept cryptocurrency as a means of payment. The survey also found that $3.5 billion worth of crypto-linked transactions occurred in 2021.

Bitcoin mining accounting

Many of the North American Bitcoin Miners produce their accounts under US Generally Accepted Accounting Principles (GAAP). These rules have determined that changes in value of cryptocurrencies can only be reported when a change in value reflects a lower price.

Financial Accounting Standards Board (FASB) issued a rule in 2001 called ASC 360 which includes the financial accounting and reporting for the impairment of intangible assets, and with Bitcoin and cryptocurrencies treated as intangible assets, companies can only write down the value as an impairment expense.

Bitcoin is a volatile asset, as we've seen over the past 10 months, including the fall from its November 2021 high of $69,000 by over 72% to its current price of $19,000. The current rule set is fine when the value of the asset is falling, but the current regulations make no allowance for accounting a true and fair value when the value of Bitcoin and cryptocurrencies increase. And when it comes to reporting the value of Bitcoin or cryptocurrencies in the accounts, it will be shown at the lowest value at any point during the reporting period.

New proposed changes

This month we have finally seen movement by the FASB, which is responsible for establishing standards for public companies that follow GAAP, by announcing it is going to allow “fair value” accounting for Bitcoin and cryptocurrency on the balance sheet

This change is important, as it will properly reflect the true value of cryptocurrency on the balance sheet, and more importantly, because it highlights that Bitcoin is gaining more adoption and acceptance as an asset.

The new change will allow companies to show the value of Bitcoin on the balance sheet as at the close of each reporting period – generally a quarterly period. They will be able to account the change in value, up or down, through the profit and loss account.

This change will also prove extremely useful for institutional and retail investors because it will accurately reflect the liquidity and assets of the company and prevent the need to search updates to determine what the “fair value” actually is.

Unfortunately, it's difficult to say when this proposed standard will be formally released as a rule. The FASB's proposed rule is just that: a proposal. The rule must make its way through various hands before final implementation.

Still, the FASB has indicated that this new rule will be mandatory and not optional for reporting, and there is belief that this could occur as quickly as calendar year 2023.

Photo by Kelly Sikkema on Unsplash