Accountants, Lawmakers Urge Rules on Crypto Accounting

The Securities and Exchange Commission, which oversees U.S. securities markets, is considering new regulation for the cryptocurrency market to prevent fraud. Chairman

Gary Gensler,

who taught courses on digital currencies at the Massachusetts Institute of Technology before he took office, has argued that investor protection rules similar to those that cover derivatives and equities should apply to crypto exchanges.

The Basel Committee for Banking Supervision, which sets global standards for banking regulation, last month suggested banks dealing in crypto assets should hold substantial buffers to cover potential losses.

On the accounting front however, there hasn’t been much progress. The Financial Accounting Standards Board, which sets accounting standards for public and private companies and nonprofits in the U.S., last year decided against adding the topic to its agenda, saying investing in cryptocurrencies isn’t widespread among companies.

Last month, the FASB launched an agenda consultation, its first in five years, seeking the public’s views on what its long-term priorities should be. Depending on the feedback, the board could consider new accounting projects such as financial reporting on digital assets. The FASB expects to review the responses, which are due Sept. 22, by early next year, a spokeswoman said.

It is too early to tell what, if any, action the FASB would take on cryptocurrency investments, the spokeswoman said.

The issue of how companies account for crypto assets is separate from how they pay taxes on the investments.

Because there are no specific binding accounting rules yet, companies with crypto holdings classify them as indefinite-lived intangible assets—similar to trademarks and website domains—following nonbinding guidelines from the Association of International Certified Professional Accountants.

Under these guidelines, businesses have to review the value of these assets at least once a year. Companies have to write down the value if it drops below the purchase price, depending on the result of their impairment test. However, if the value goes up, companies can record a gain only when they sell the assets, not while holding the assets.

That’s creating an imperfect picture for investors seeking to understand a company’s crypto investments. “You’re getting really less than half the story,” said Aaron Jacob, head of enterprise resource planning at software provider TaxBit Inc., which helps individuals and companies figure out the taxes they owe on their cryptocurrency holdings. Mr. Jacob wrote to the FASB last month asking it to set rules for crypto assets.

A bipartisan group of seven congressmen led by

Rep. Tom Emmer

(R., Minn.) made a similar request to the FASB in May, pointing to the surge in value of these digital assets.

“Lack of thoughtful and carefully developed authoritative guidance from the FASB threatens the ability to create accurate and consistent financial reporting of a large and fast-growing financial asset class,” they wrote. Mr. Emmer last week introduced a bill seeking for Congress to provide a clear definition of digital assets under U.S. securities law.

Big Four accounting firm PricewaterhouseCoopers said it encourages standard-setters to look into accounting for cryptocurrencies. KPMG declined to comment, while Deloitte and Ernst & Young didn’t immediately respond to requests for comment.

So far, most chief financial officers have steered clear of crypto investments due to concerns about volatility. The absence of tailored accounting rules only exacerbates these worries, said Deniz Appelbaum, assistant professor of accounting and finance at Montclair State University. “If there was a standard set, CFOs would know how to proceed…and whether an investment in coins is appropriate for their firm,” she said.

For companies that do dabble in cryptocurrencies, shareholders want to see details such as the underlying purpose of crypto investments, the purchase price and the quantity, said Ben Wechter, a research analyst at Zion Research Group, which provides investors with information about accounting and tax issues.

One prominent corporate investor in cryptocurrencies is Tesla, which disclosed in its annual report in February that it bought $1.5 billion in bitcoin. As of March 31, its bitcoin holdings totaled $2.48 billion, according to a quarterly filing.

Square recorded cryptocurrency holdings of $472 million as of March 31, up from $136.5 million at the end of December.

MicroStrategy Inc.,

a software company based in Tysons Corner, Va., said it had $1.94 billion in bitcoin as of March 31, up from $1.05 billion at the end of December, in part due to additional bitcoin purchases during the first quarter. Chief Executive

Michael Saylor

recently said the company is making do with the current accounting method for now.

One alternative to treating crypto holdings as intangible assets could be to allow companies to apply fair-value accounting rules for certain digital assets if the fair value can be determined readily, the FASB said. Bitcoin would meet the criteria, according to Zion Research’s Mr. Wechter.

Under fair-value accounting, companies recognize losses and gains in value immediately and treat the digital assets as financial assets, not as intangibles. This approach captures the value of digital assets more accurately, said Dan Amiram, a vice dean and accounting professor at Tel Aviv University. But, because it incorporates both gains and losses, fair-value accounting can create even more volatility on companies’ income statements, he said.

Practitioners expect that accounting for digital assets will remain a headache for executives because of the volatility in trading, which is something that investors and analysts want to see reflected in financial statements.

“If there is a market value to it, you want that on the balance sheets of companies,” said Shripad Joshi, a senior director at ratings firm S&P Global Ratings.

Write to Mark Maurer at [email protected]