ASC 610-20 provides specific guidance for transfers of certain nonfinancial assets, such as intangible assets, to non-customers. Accordingly, sales of crypto assets that are accounted for as intangible assets not in scope of ASC 350-60 to non-customers should be accounted for under ASC 610-20.

Determining whether the counterparty to a disposal arrangement is a customer is important as proceeds received from customers will follow the guidance in ASC 606.

If a counterparty to a contract engages with an entity to obtain the output of the reporting entity’s ordinary activities in exchange for consideration, that counterparty is considered a customer. Otherwise, the counterparty is considered a non-customer.

Transactions with customers will be reported in revenue and cost of goods sold under ASC 606 while transactions with non-customers will usually be presented as a gain or loss included in income from continuing operations under the applicable guidance. See CA 2.3.2.

Example CA 2-4 addresses how to determine if a sale is to a customer within its ordinary business activities.

EXAMPLE CA 2-4
Determining whether a sale is to a customer

Aircraft manufacturer had excess capital that it invested in crypto assets. It subsequently sold those assets to a third party as it needed additional working capital.

How should Aircraft manufacturer present the sale in its income statement?

The sale of the crypto assets is outside the manufacturer’s ordinary business activities and therefore the third party would be deemed a non-customer. Accordingly, the proceeds should not be reported in revenue but rather the difference between the proceeds and carrying amount of the crypto assets should be reported as a gain or loss.

In order for a reporting entity to derecognize crypto assets, it must evaluate whether it transferred control based on how it classifies the crypto assets it holds. Crypto assets classified as intangible assets not in scope of ASC 350-60 would be subject to ASC 610-20. Crypto assets classified as financial instruments would require evaluation under ASC 860, Transfers and Servicing.

For crypto assets classified as intangible assets not in scope of ASC 350-60, an entity must determine whether it has transferred control of the crypto assets in accordance with ASC 610-20. The seller should first evaluate whether it has (or continues to have) a controlling financial interest under ASC 810, Consolidation. If the seller has a controlling financial interest, derecognition would not be appropriate as it would continue to consolidate the applicable subsidiary.

If the seller determines it does not have a controlling financial interest, the seller should next evaluate the guidance in ASC 606 to assess whether control has transferred. The reporting entity should first evaluate the criteria in ASC 606-10-25-1 to determine whether a contract exists.

If a contract does not exist (e.g., if collection of consideration from the counterparty is not probable), the entity would continue to recognize the crypto asset as required by ASC 350-10-40-3. Additionally, the entity will record a liability for any consideration received. Subsequently, the entity will continue to assess the contract to determine the point at which the criteria for revenue recognition are met in accordance with ASC 606-10-25-1. Alternatively, the reporting entity would derecognize the liability when one of the events described in ASC 606-10-25-7 occurs (e.g., the contract is terminated).

Once the seller determines the criteria for revenue recognition are met, the seller would need to determine the point at which the counterparty obtains control as described in ASC 606-10-25-30. For crypto assets, the transfer of control analysis should consider which entity bears the risks and rewards of ownership. Once control is transferred, the crypto asset will be derecognized and the seller would recognize the resulting gain or loss.

Crypto assets are typically fungible (i.e., each unit is identical and has the same fair value at any given time). When an entity sells a portion of its crypto asset holdings, it will need to determine a systematic and rational approach to identify the units sold. Reporting entities should have a method for tracking the acquisition date and purchase price for their crypto asset holdings. In addition, entities should adopt a method, such as specific identification, first in, first out (FIFO), or last in, first out (LIFO) to identify the units sold and determine the cost basis to use.

If the counterparty has not yet obtained control over a crypto asset, but has paid cash to the seller, the seller should not derecognize the crypto asset but instead apply the guidance in ASC 606-10-45-2 and record a liability for any consideration received.

For many transactions involving crypto assets within the scope of ASC 610-20, control over each crypto asset in the contract will transfer at the same time. This means that the crypto assets transferred would be derecognized at the same time. Therefore, in practice, the reporting entity may not need to separate and allocate the consideration to each distinct crypto asset. However, for other transactions, control over each distinct crypto asset may not transfer at the same time. This would result in those crypto assets being derecognized at different points in time, making it necessary to separate and allocate consideration to each distinct crypto asset in the transaction.

Once a reporting entity determines that it should derecognize a crypto asset under ASC 610-20, the gain or loss on the transfer must be determined. The gain or loss is calculated as the difference between the consideration allocated to each distinct crypto asset and its carrying amount.

Crypto assets will likely be subject to impairment testing prior to derecognition, therefore significant losses are not expected upon derecognition.

Example CA 2-5 addresses how to determine the cost basis for the sale of a portion of a reporting entity’s crypto assets.

EXAMPLE CA 2-5
Determining cost basis for crypto assets sold

On March 1, 20X1, Reporting Entity sold 50 units of a crypto asset not in scope of ASC 350-60 to Buyer. The sale is outside Reporting Entity’s ordinary business activities and therefore Buyer is not considered a customer of Reporting Entity. Buyer agrees to pay Reporting Entity $35,000/unit for the 50 units. Reporting Entity uses FIFO to determine the cost basis for its crypto asset sales. The following table shows Reporting Entity’s holdings of the crypto asset. Assume no prior impairment was incurred for these crypto assets since the acquisition dates.

Reporting Entity has entered into an agreement to sell crypto assets (nonfinancial assets) that are not an output of its ordinary business activities. ASC 610-20 requires that Reporting Entity follow the measurement principles in ASC 606 to calculate the gain or loss recognized upon sale. Accordingly, the total consideration received by Reporting Entity of $1,500,000 is compared to the carrying value of the 50 units of crypto assets sold equal to $1,150,000 (see calculation using FIFO below). The difference results in a gain of $350,000 that Reporting Entity would recognize in its income statement. The Reporting Entity should not use the weighted-average purchase price as the cost basis.

FIFO cost basis calculation

Noncash consideration received in exchange for the transfer of crypto assets needs to be measured at fair value at contract inception. If a reporting entity exchanges one crypto asset for another crypto asset, the reporting entity may not be able to reliably determine the fair value of noncash consideration received. In this case the value of the noncash consideration received should be measured indirectly by reference to the standalone fair values of the crypto assets sold or transferred by the reporting entity.

Example CA 2-6 addresses when a reporting entity enters into a contract to exchange one unit of a crypto asset for another unit of crypto asset.

EXAMPLE CA 2-6
Exchanging one crypto asset for another crypto asset

Company A exchanges one unit of a crypto asset not in scope of ASC 350-60 it holds for one unit of another crypto asset not in scope of ASC 350-60 held by Company B. The fair value of Company B’s crypto asset is determined to be $12,000. The carrying value of Company A’s crypto asset is $10,000.

How should Company A account for the exchange?

ASC 610-20 requires an entity to measure the fair value of noncash consideration in accordance with ASC 606. The difference between the fair value of the noncash consideration received and the carrying value of the asset sold results in a gain or loss that should be recognized in the income statement. In an arm’s length transaction, it would be rare to recognize a loss as the crypto asset being sold would likely have been previously impaired.

Accordingly, Company A should derecognize its one unit of crypto asset at carrying value and record the one unit of crypto asset acquired at fair value:

When a contract includes the transfer of more than one distinct asset, an entity should allocate the consideration to each distinct asset in accordance with ASC 606-10-32-28 through ASC 606-10-32-41. Generally, this means that the consideration will be allocated to the distinct assets based on their relative standalone selling prices.

Example CA 2-7 addresses the determination of cost basis when a bundle of crypto assets is sold for a stated contract price.

EXAMPLE CA 2-7
Sale of multiple crypto assets for single contract price

On March 1, 20X2, Company A sold a bundle of crypto assets not in scope of ASC 350-60 to Buyer for a stated contract price of $225,000. The crypto assets sold under the contract are shown below. Assume no prior impairment was incurred for these crypto assets.

On the date of the sale, Company A observes that the fair value of Crypto Asset A is $21,000/unit and the fair value of Crypto Asset B is $20,000/unit.

How should Company A account for the sale?

Company A should first record the impairment of its two Crypto Asset A units acquired on April 20, 20X1 as the carrying value of $23,000/unit exceeds the observed fair value of $21,000 on the date of sale. Company A should record an impairment loss of $4,000.

The contract price of $225,000 should then be allocated to each crypto unit based on the fair value of each type of crypto assets on the date of sale as follows:

Company A should therefore record a gain on sale of $15,000: