Accounting Treatment of Crypto Currencies according to US GAAP

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Apr 19, 2022

Accounting Treatment of Crypto Currencies according to US GAAP

Transcript:

Bhumika Shah

Hello, folks. Here is your host, Bhumika Shah on the podcast setup initiated by Unison Globus -The public accountant on purpose. We are here today, with the second episode of the cryptographic series, the accounting treatment of cryptocurrencies according to US Gaap, before we start our current episode, let me refresh your memory and talk about our first episode.

In our first episode, we talked about what is cryptocurrencies, and the robust foundation behind them, which is the blockchain. Is it the alternative to the traditional financial system and why regulations are very necessary for that market? If you want to know answers to all of these questions, please listen to our first episode, so that you can sink into our current episode link. Right in the caption.

Without further ado, let’s get to our second episode and welcome our speaker Mr. Uday Ranpara. He’s from the directorial desk of Unison Globus. A profound academician, his area of expertise are US Gaap and IFRS, welcome, sir.

Thank you for being here. You are an educator. So it suffices our purpose. You know, in the market, there are many concerns and various opinions about the treatment of cryptocurrencies in the books of account. So, help us understand. What is the right way to do it?

Uday Ranpara

Thank you, Bhumika. Thank you for inviting me for this series and thank you to give me such an interesting topic, cryptocurrency, and its accounting. I must tell you that this is one of the most talked-about topics in the world of accounting because there is no specific accounting standard codification as far as Cryptocurrency is concerned, other is no specific notation for that, but there is guidance.

Uday Ranpara

So, let me first take you through the whole journey, you know, when the cryptocurrency came in, there were different options for its accounting. For example, should it be accounted like an inventory? That means you consider that to be inventory and record it as an inventory answer to it was no, it cannot be recorded as an inventory, because inventories are the goods held for sale in the ordinary course of business. And this is nothing which you hold for the ordinary course of business. So, cancel that.

Bhumika Shah

Okay

Uday Ranpara

Then comes, whether can you consider that to be cash or cash equivalent, but for something to become cash or cash equivalent, there has to be a legal tender to it. And because there is no legal tender, you cannot consider that to be cash or cash equivalent.

And then comes,  should we consider that to be a financial instrument with needs to be fairly valued every year-end, and we record the video gains or losses through either income statement or other comprehensive income, or should we consider that to be an intangible asset and recorded as an intangible asset which does not have a specific useful life. That means its useful life is infinity. So that’s where the Accounting Board has given us the guidance that this needs to be considered as an intangible asset and this intangible asset needs to be recorded at its original cost at the time of acquisition. So, what is the original cost at the time of acquisition?

Let me give you a very simple example. My cost of acquiring a currency is, say hundred dollars. And on that, I am paying one dollar commission. So my total cost is $101. So that is how we recorded at the time of acquisition at its cost of acquisition.

So we recorded at cost and then, as I say, there are three basic steps. We need to understand accounting for crypto number 1, at the time of acquisition. How do we record it? Number two, every year, the subsequent accounting means every year how we measure it. And number three, when we derecognize, that means when it goes out of our financials, at what value, it goes out, and how to record it. So, let me take them one by one, as I discussed at the time of acquisition. We will record it at a cost.

Number two, subsequent evaluation or measurement, or its accounting.

Bhumika Shah

Right

Uday Ranpara

So subsequently, it will be accounted for at cost less impairment if any.

Bhumika Shah

Okay

Uday Ranpara

Because its useful life is infinity. There is no amortization only. An impairment test needs to be done every year and we need to record the impairment loss. If any question arises, “Can this impairment loss be reversed in the future?”, and the answer is very clear.

No, it cannot. The reason being in US GAAP, once you impair an asset, you cannot reverse the impairment loss, unlike IFRS. In IFRS, we know that impairment can be reversed, but in the US GAAP impairment cannot be reversed. So the subsequent measurement is only at Cost Less impairment. And what at the time of the derecognition? That means, for example, you are paying cryptocurrency for buying something. So that means the cryptocurrency is going out of your financials at what value you need to evaluate first of all, so at that point of time, you need to Value it at its fair value. And the difference between this fair value in the original cost is your gain or loss to be recognized in the income statement in that particular Year.

I hope we are very much Clear.

Bhumika Shah

Yes.

Uday Ranpara

So, three basic steps of accounting or three basic points of accounting at the time of acquisition, subsequently, I mean different years,

Bhumika Shah

Right.

Uday Ranpara

And at the time of derecognizing it when it is going out of your financial statement. So this is all about accounting for crypto.

Bhumika Shah

This was very informative and insightful and you know, this gives us the basics to start with but I have a very important question which is our million dollar question series.

Uday Ranpara

What makes us understand that the value needs to be impairment or let’s say what are the parameters or factors that cause impairment? That’s a very good question Bhumika, I must tell you. How do measure impairment or how do we come to know there is an impairment or not. There are normally four impairments. There are two-step models of one-step models for intangibles, specifically Goodwill or crypto. We need to have one step model test.

So what is this one-step model test, you simply have to compare the carrying cost of that particular instrument with its Affair value in the market? If fair value is less than its cost. Then we need to find the impairment loss, which is the difference between these two. Cost minus fair value and that much, we write off or that much, we charge to the income statement as an impairment loss.

Bhumika Shah

Right

Uday Ranpara

What are the different parameters? Which tells us that there is an impairment apart from here. And so, you know that cryptocurrency is all based on demand and Supply.

Bhumika Shah

Correct

Uday Ranpara

So demand and supply are very important parameters. If demand and supply are changing and there’s a huge supply and less demand. Then the prices will go down. Fair value will go down. So that sees that there can be impairment.

Bhumika Shah

Right.

Bhumika Shah

So volatility.

Uday Ranpara

Well, some abnormal scenarios like war and other such calamities.

Bhumika Shah

Correct, economic conditions of the country.

Uday Ranpara

And budget in the country.

Uday Ranpara

Right

Uday Ranpara

Fiscal policies of the country

Bhumika Shah

Right

Uday Ranpara

Elections in the country. These are a few examples due to which we know that you know, there can be impairment and we need to do an impairment test.

Bhumika Shah

Right

Uday Ranpara

So in once portfolio, they should check every year. That’s mandatory. So any intangible asset which has Infinity useful life. You need to check every year-end whether it’s impaired or not. Over and above that, if these conditions exist, then within the year also, you need to test for impairment.

Bhumika Shah

Right

Uday Ranpara

For interim reporting.

Bhumika Shah

Thank you, sir. Thank you for being here and educating us and helping us understand, what is the right way to do about it? I hope listeners, it was all helpful to you. Stay tuned for our next episode, “Tax implications of cryptocurrencies in the books of accounts”. For more information regarding Unison Globus. Please check the website unisonglobus.com. Unison Globus beyond Outsourcing. Thank you.

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