Reporting entities may accept crypto assets as a form of payment in exchange for goods or services they offer to customers. To determine the classification of the crypto asset received, the reporting entity would consider the guidance in CA 1
Crypto assets that meet the definition of intangible assets and are received by a reporting entity as payment for goods or services are a form of noncash consideration. Reporting entities should follow the guidance in ASC 606
, Revenue from Contracts with Customers,
on accounting for the receipt of noncash consideration, which requires the consideration to be recorded at fair value at contract inception. That is, the entity should use the fair value of the crypto asset, measured at the time when all requirements of ASC 606-10-25-1
have been met, as the transaction price.
Refer to RR 4.5
for further guidance on the accounting for noncash consideration.
If the reporting entity continues to hold the crypto assets received, changes in value after contract inception are not reflected in revenue. For example, if the crypto asset is classified as an indefinite-lived intangible asset, any impairments would be reflected as an operating expense.
If the crypto asset received is classified as a financial asset, changes in value after initial recognition will be reflected in other income/loss.
3.1.1 Accounting for crypto assets by broker-dealers
A broker-dealer that is within the scope of ASC 940
, Financial services – Brokers and dealers,
should recognize any commission income received from its customers as revenue as the services are performed. Any crypto assets held by a broker-dealer as an agent for its customers should not be reflected on the broker-dealer’s balance sheet.
Sometimes broker-dealers will hold crypto assets for their own proprietary trading. ASC 940-320-35-1
indicates that proprietary trading inventory should be measured at fair value with changes in fair value recognized in profit and loss. We believe that it is acceptable to interpret the reference to inventory in this context to include crypto assets as the term inventory has historically been interpreted to include other assets such as physical commodities.
3.1.2 Crypto assets held on behalf of third parties by a custodian
Crypto assets may be held by a custodian for safe keeping on behalf of its customers. Arrangements for holding the crypto assets can vary, but generally there will be a contract, or terms and conditions, that sets out the nature of the arrangement.
If the custodian does not meet the criteria to be in the scope of ASC 940
, Financial services – Brokers and dealers,
this guidance should not be applied by analogy. Rather, the determination as to whether the custodian should record an asset and a related liability for the crypto assets it holds on behalf of its customers will require the use of judgment based on the facts and circumstances. In determining whether to reflect the assets on or off-balance sheet, the custodian may need to consider the following factors, among others:
- The extent to which the rights and obligations of the parties are defined under legal or regulatory frameworks, or under the terms of a contract
- The rights of the customers to the crypto assets held on their behalf in the event the custodian files for bankruptcy
- The ability of the customer or custodian to transfer, loan, pledge, or encumber the crypto assets
- The ability of the customer to access the private key or transfer the crypto assets to another wallet at any time
- Which party bears the risk of loss as a result of fraud or theft
- Which party obtains the benefits of price appreciation and the impact of price depreciation
- The degree of segregation of crypto assets held on behalf of customers from crypto assets owned by the custodian
- The evidence of ownership of the crypto assets that are held on behalf of the customers (e.g., is the crypto in a separately named wallet or are there off-chain transaction records)
If the custodian determines that it has control of the asset and therefore should reflect the asset on its balance sheet, it will also need to reflect a corresponding liability. The liability will need to be assessed to determine whether it contains an embedded derivative under ASC 815
, Derivatives and hedging
3.1.3 Receivable settled in crypto asset
A reporting entity may satisfy its performance obligation prior to receiving the consideration. When the expected consideration is a crypto asset, the reporting entity should consider whether the resulting contract asset or receivable includes an embedded derivative. In determining if an embedded derivative is present, specific consideration should be given to whether the crypto asset meets the criteria for net settlement (i.e., whether it is readily convertible to cash). See DH 4
for guidance on embedded derivative instruments. A similar analysis would be necessary for a reporting entity that has an obligation to deliver crypto assets.