In February 2023, the AICPA updated its guidance on the accounting for crypto asset lending as outlined in Question 25 of the AICPA’s Practice Aid, Accounting for and auditing of digital assets (“Digital Assets Practice Aid”). Question 25 provides an example of a reporting entity that lends crypto assets to a counterparty for a specified period of time in return for a fee. The fact pattern in Question 25 is similar to the following: Lender lends 1,000 units of a crypto asset to Borrower for one year. The loaned crypto asset meets the definition of an intangible asset in ASC 350, Intangibles – Goodwill and Other. The lending arrangement requires Borrower to pay a fee of one unit of the crypto asset each month during the term and return 1,000 units of the crypto asset to Lender at the end of the term. Control of the loaned crypto asset is transferred to Borrower upon the transfer, and Borrower has the right to transfer, encumber, and pledge the crypto asset at its discretion.

Applying the revised guidance results in a conclusion that it would be appropriate for the lender to derecognize the loaned crypto assets in this circumstance.

The AICPA’s Digital Assets Practice Aid provides a list of factors that should be considered when evaluating whether loaned crypto assets should be derecognized.

When the loaned crypto assets are derecognized by the lender, the SEC staff would not object to the lender recognizing an asset that represents its right to receive the crypto assets from the borrower at the end of the loan period (which may be referred to as a crypto asset loan receivable). The crypto asset loan receivable would be recognized at the fair value of the loaned crypto assets at the time the crypto assets are transferred to the borrower unless industry-specific guidance applies to the loan (e.g., investment company guidance under ASC 946, Financial Services – Investment Companies). The lender would recognize any difference between the fair value of the crypto assets at the time of transfer and the carrying amount of the crypto assets in the income statement. If the crypto assets are accounted for as intangible assets under ASC 350-30, they would be initially measured at cost and then subsequently evaluated for impairment prior to derecognition. Accordingly, the derecognition of the carrying amount of the crypto assets and the recognition of the crypto asset loan receivable at fair value will often result in a gain. If the crypto assets are accounted for as intangible assets in scope of ASC 350-60, they would be initially measured at cost and then subsequently measured at fair value. Accordingly, the crypto assets would be derecognized, and the entity would recognize a crypto asset loan receivable. The lender would continue to remeasure the crypto asset loan receivable to the fair value of the loaned crypto assets at each subsequent reporting date.

Additionally, because the crypto asset loan receivable exposes the lender to the credit risk of the borrower, the lender should recognize an allowance for expected credit losses related to the crypto asset loan receivable utilizing the principles in ASC 326, Financial Instruments – Credit Losses.

The revised interpretive guidance in the AICPA’s Digital Asset Practice Aid is effective immediately. The SEC staff would not object to this model being applied like a new accounting principle under ASC 250, Accounting Changes and Error Corrections, which requires the guidance to be applied retrospectively for all periods presented (unless impracticable to do so).

The accounting by the borrower in a crypto lending arrangement outlined in Question 26 of the AICPA’s Digital Assets Practice Aid was not revised. We believe the borrower in a crypto lending arrangement may determine that it has obtained control of the asset and would accordingly recognize the crypto asset on its balance sheet. It would also recognize an obligation to return the crypto asset to the lender. While the asset may be accounted for under ASC 350 as an intangible, the obligation to return the asset could be viewed as a hybrid instrument with a debt host contract and payments linked to the fair value of the crypto assets. Accordingly, the borrower may need to assess whether bifurcation of the embedded feature is required under ASC 815, Derivatives and hedging, with specific consideration given to whether the crypto assets could be net settled.