Changing reporting environment at the intersection of accounting and cryptocurrencies

Cryptocurrencies continue to reshape the financial landscape. As cryptocurrencies move from niche to mainstream, companies are grappling with how to account for these volatile digital assets. A new study by Robbie Moon, an accounting professor at the Scheller School of Management, and co-authors Chelsea M. Anderson, Vivian W. Fang, and Jonathan E. Shipman reveals how publicly traded U.S. companies have navigated their crypto holdings and accounting practices over the past decade.

ASU 2023-08, a new rule from the Financial Accounting Standards Board (FASB), aims to bring clarity and consistency to crypto asset reporting, along with fair value reporting requirements. Moon’s research is a comprehensive look at a range of companies from 2013 to 2022, highlighting the rapid increase in corporate crypto investments and the varied and often inconsistent ways in which companies report their investments.

In Accounting for Cryptocurrency, Moon and his co-authors work to better understand this pivotal point in financial reporting through a research study that delves into why companies hold cryptocurrencies for purposes such as mining, receiving payments, and investing, and how reporting practices have evolved to meet this moment. The study is published in the Journal of Accounting Research.

Read on to learn more about Moon’s research and why it’s important now.

Why do companies hold cryptocurrencies and how has this changed over time?

There are three main reasons why companies hold cryptocurrencies. That’s because they consider it mining cryptocurrencies, accepting them as payment, or investing. In the early days, most businesses held cryptocurrencies because their customers used them to pay for goods and services. Around 2017, that trend diminished and more companies started mining cryptocurrencies on their own. Currently, mining accounts for about half of companies’ virtual currency holdings, and the rest is accounted for by payment acceptance and investment.

What are the main challenges companies face when trying to report their crypto holdings in their financial statements?

Until the end of 2023, there were no formal rules on how companies should report cryptocurrencies in their financial statements. Back in 2018, the big four accounting firms (Deloitte, PwC, EY, and KPMG) stepped in and proposed treating cryptocurrencies like intangible assets, similar to things like patents and trademarks. This is known as the impairment model.

What is the difference between “fair value model” and “impairment model” in accounting for crypto assets and why is it important?

The two accounting methods differ in how they handle changes in crypto value. A fair value model updates the value of a company’s cryptocurrencies to match the current market price each reporting period. When prices rise or fall, the change appears on a company’s income statement as a gain or loss.

The impairment model allows a company to record a loss only if it is less than what it paid. Even if the price goes up, you can’t record the increase.

The difference between the two approaches is best seen when the price of a cryptocurrency increases. Under the impairment model, a company’s balance sheet will understate the true value of the virtual currency because no profits can be recorded. Fair value models allow companies to adjust the balance sheet value of cryptocurrencies in response to changes in market prices.

What factors led to ASU 2023-08 supporting fair value reporting?

When the FASB was trying to decide whether to add cryptocurrency accounting to its standard-setting agenda, it asked the public for feedback. The response was overwhelming, with most practitioners and companies calling for the use of fair value models.

How are major accounting firms like Deloitte and PwC influencing how companies report their crypto holdings?

In the absence of formal rules for complex issues like cryptocurrency accounting, the Big Four often step in to guide companies. In 2018, they recommended the use of the impairment model they considered the most appropriate based on existing standards. Most companies have since switched from fair value reporting to an impairment approach.

The 2018 guidance was based on what was allowed under the standards at the time. With the new rules in place, both companies will help customers manage the transition.

Does using fair value accounting for cryptocurrencies make a company’s stock price more volatile or its earnings reports more informative to investors?

The main drawback of using fair value models for risky assets like cryptocurrencies is the impact that volatility has on returns. Moon’s research suggests that companies using fair value models experience increased stock price volatility, and the model does not appear to make returns more profitable for investors. That said, the results should be viewed with caution, as the sample in this study is primarily comprised of small and medium-sized enterprises.

Why is this research important now?

This research is important as more companies are investing in cryptocurrencies. This trend is expected to further expand in the future. The study examines how companies treated cryptocurrencies before formal rules were announced in 2023, and shows that many companies treated cryptocurrencies similarly to traditional investments. This provides a baseline for evaluating new rules in future studies.

The study also cautioned that the fair value approach does not necessarily provide investors with profitable earnings reports and can lead to greater share price volatility.