Team Project

Posted: August 26th, 2021

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This memo addresses the classification of cryptocurrency and its measurement under U.S. GAAP about the cryptocurrency holdings of Clientlogix. Thememo first outlines why the cryptocurrency of Clientlogix cannot be classified as cash, cash equivalents, or inventory. While U.S. GAAP does not currently specify the classification of cryptocurrencies, the definition of intangible assets indicates the cryptocurrency of Clientlogix would be classified as an intangible asset.

Given this classification as an intangible asset, the initial measurement of the cryptocurrency would be at cost. Subsequent measurement would follow the guidance for indefinite life intangible assets under U.S. GAAP.

Classification in Statement of Financial Position

Before the recommendations for the classification of Clientlogix’s cryptocurrency holdings in the statement of financial position under the U.S. GAAP, it is essentialfirst to address where cryptocurrencies should not be classified and why.

An initial thought was that Bitcoin and other cryptocurrencies should be classified as Cash and Cash Equivalents because of its ability to be used during transactions and to obtain other goods and services. Although it has similarities to foreign currency insofar that it can be a medium of exchange and investment, the definitions of both cash and cash equivalents set by the FASB alienate cryptocurrencies (Rix). A government entity does not back cryptocurrencies and they are not able to be held for the owning entity by a bank or other financial institution, as cash is required to be (ASC Master Glossary). The failure to recognize cryptocurrencies and their value by any bank is strictly decided by supply and demand for that cryptocurrency. Further, despite being readily convertible to cash, cryptocurrencies present quite a high risk of change in value, which is strictly opposed to the intended FASB standards for cash equivalents (ASC Master Glossary). The amount of the cryptocurrency holdings is unknown, mainly on any given day due to the extreme volatility in the supply/demand and value. Due to an entity’s inability to accurately record the volatile nature of current and future values of a cryptocurrency, classifying a cryptocurrency as cash or a cash equivalent is in direct conflict with the fundamental principles of offering predictive or confirmatory value to financial statements.

Another possible classification is inventory. For the most part, cryptocurrencies are held for exchange of other assets, which would not make it inventory (ASC Master Glossary). Some companies, however, may specifically mine cryptocurrencies with intent to sell as part of business; in this case, it could be considered inventory (“Classification of Cryptocurrency Holdings”). However, Clientlogix sells and supports customer relationship management software, not a cryptocurrency, so they would not use cryptocurrency as inventory but instead as a means of exchange or investment.

A cryptocurrency is not considered an inventory when it is used for speculative or as a medium to expedite a particular transaction. According to ASC Master Glossary, this is regarded as a component of tangible personal properties that are to be sold during normal business transactions. Notably, there are those cryptocurrencies that may be held for sale during the normal course of business transactions (ASC Master Glossary). These are usually part of the business model and traded in the same way brokers treat the inventories they hold on the stock market. Possible, consideration can be made in the future by FASB such that entities can account for cryptocurrencies held as inventory given that it describes part of their business model to hold cryptocurrencies in the same way brokers hold inventories. Nevertheless, the business should make careful considerations about circumstances and existing facts besides thoroughly consulting appropriately before accounting for cryptocurrencies held as inventories.

The proper classification for Clientlogix’s cryptocurrency in the statement of financial position should be under Intangible Assets. ASC 350-10-20 defines intangible assets as “Assets (not including financial assets) that lack physical substance. (The term intangible assets is used to refer to intangible assets other than goodwill.)” Compared to the majority of other financial assets, cryptocurrencies lack physical representation, yet infinitely divisible. Specifically, cryptocurrency has been defined as an indefinite-lived intangible asset. The most common reason for this classification is that cryptocurrency has no physical substance. Cryptocurrency is also considered an indefinite-life intangible asset because there is no “expiration” or a limit on when it has to contribute to cash flow. For these reasons, it is classified as an indefinite-life intangible asset given it cannot be classified as the other categories stated.

Initial and Subsequent Measures of Value of Cryptocurrency

In addition to classifying Clientlogix’s cryptocurrency position under the Intangible Assets section of the statement of financial position, it is also important to note the initial and subsequent determination of value processes because it is of utmost importance to represent the value of the cryptocurrencies to investors accurately. The initial value of the cryptocurrency holdings must be recorded at the cost of acquiring the cryptocurrency (ASC 820-10-30-2).

Updating the value of cryptocurrencies is somewhat similar to the accounting standards in place for indefinite life intangible assets. Because the cryptocurrencies have no expiration date, they are deemed to last indefinitely; accordingly, no amortization expense should be debited to update the value of the cryptocurrencies. Again, like the indefinite life intangible asset accounting standards, Clientlogix’s cryptocurrencies’ value should be analyzed on an annual basis; if it is deemed to have risen, no action needs to be taken. However, if the value of the cryptocurrencies has dropped substantially, as evidenced by a significant decline in the quoted price on cryptocurrency exchanges, then they need to be impaired (ASC 350-30-35-7).Subsequently, according to ASE 946, investment companies holding cryptocurrencies as their part of the investment business model are required to account for them just the same way they would measure other investments initial and subsequently at a fair value.  Thus, to ensure transparency, it is recommended that Clientlogix provide additional disclosures in the financial statements regarding this holding (Keiso 7-6). Equally, the biggest concern with FASB Classification Committee is the way cryptocurrency assets are held.  If a given entity is planning to hold cryptocurrency assets within a short period, then it will not be appropriate to classify cryptocurrency as an indefinite-lived intangible asset at least as it relates to the potential of an asset to contribute to the holding cash flows for the entity.

Closing

Given current definitions of cash, cash equivalents, and inventory under U.S. GAAP, the cryptocurrency holdings of Clientlogix cannot be classified as these types of assets. Although U.S. GAAP does not currently address cryptocurrency in its guidance, the definition of intangible assets indicates that Clientlogix should recognize its cryptocurrency as such. Clientlogix should follow U.S. GAAP guidance regarding the initial and subsequent measurement of intangible assets when recording their cryptocurrency holdings.

Works Cited

“Classification of Cryptocurrency Holdings.” The Deloitte United States, Deloitte, 23 Dec. 2019, www2.deloitte.com/us/en/pages/audit/articles/fra-classification-of-cryptocurrency-holdings.html.

Keiso, Donald E., et al. Intermediate Accounting. 17th ed., John Wiley & Sons, Inc., 2019

Rix, Nancy A. “FASB.org.” FASB.org, CalCPA, https://www.fasb.org/cs/BlobServer?blobkey=id&blobnocache=true&blobwhere=1175836008908&blobheader=application/pdf&blobheadername2=Content-Length&blobheadername1=Content-Disposition&blobheadervalue2=566828&blobheadervalue1=filename=AR-2019.UNS.014.CALCPA_APAS_COMMITTEE_NANCY_A._RIX.pdf&blobcol=urldata&blobtable=MungoBlobs.

Wahlen, J., M., Jones, J., P. & Pagach, D. The FASB Accounting Standards Codification: a User-friendly Guide. Mason, OH: South-Western Pub, 2012. Print.