2.2 Classification of Crypto Assets

2.2 Classification of Digital Assets

2.2.1 Determining the Appropriate GAAP to Apply

In determining the accounting principles to apply to a digital asset, an entity would consider whether the asset is within the scope of any specific Codification topic. The table below highlights some of the more common classifications for various asset types and outlines classification considerations. When evaluating how to account for a digital asset, an entity should first consider whether any asset classification other than intangible asset would be appropriate. If so, the entity would apply the relevant accounting for that asset class. If none of these classifications are appropriate, the entity may need to apply the guidance on intangible assets by default. See Appendix A for considerations related to digital asset classification under IFRS® Accounting Standards.

Asset Classification	ASC Master Glossary Definition	Considerations Related to the Classification of Digital Assets
Cash and cash equivalents	“[C]ash includes not only currency . . . but demand deposits with banks or other financial institutions.” “Cash equivalents are short-term, highly liquid investments that have both of the following characteristics: Readily convertible to known amounts of cash So near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Generally, only investments with original maturities of three months or less qualify under that definition.”	Digital assets generally are not backed by a sovereign government and do not represent legal tender that must be accepted as a form of payment; therefore, these assets would not meet the definition of cash. However, there are a few jurisdictions in which digital assets have been adopted as a currency by those jurisdictions’ respective central banks and may meet this definition. Digital assets also generally will not meet the definition of cash equivalents because they are not readily convertible to known amounts of cash and do not have stated maturity dates.
Financial asset	“Cash, evidence of an ownership interest in an entity, or a contract that conveys to one entity a right to do either of the following: Receive cash or another financial instrument from a second entity Exchange other financial instruments on potentially favorable terms with the second entity.”	Digital assets generally are not considered financial assets because they do not represent cash, an ownership interest in an entity, or a right or obligation to receive cash or another financial instrument. However, certain digital assets (e.g., certain stablecoins) may meet this definition if they are issued by a party that allows the holder to redeem them for cash.
Inventory	“The aggregate of those items of tangible personal property that have any of the following characteristics: Held for sale in the ordinary course of business In process of production for such sale To be currently consumed in the production of goods or services to be available for sale.”	Although digital assets may be held for sale in the ordinary course of business by certain entities, depending on their business model, these assets are not tangible assets and therefore do not meet the definition of inventory. Note, however, that IFRS Accounting Standards do not require that inventory be tangible. See Appendix A for more information.
Intangible assets	“Assets (not including a financial asset) that lack physical substance. (The term intangible assets is used to refer to intangible assets other than goodwill.)”	Digital assets typically meet the definition of intangible assets because they lack physical substance and would generally be accounted for under ASC 350 in the absence of other applicable GAAP. Entities should consider the factors outlined in ASC 350-30-35-3 when determining the useful life of an intangible asset. If no inherent limit is imposed on the useful life of a digital asset to the entity, the digital asset would be classified as an indefinite-lived intangible asset.

2.2.2 Intangible Assets

ASC 350-10-20 defines intangible assets as “[a]ssets (not including financial assets) that lack physical substance. (The term intangible assets is used to refer to intangible assets other than goodwill.)” Since many digital assets are nonfinancial assets that lack physical substance, they typically meet the definition of intangible assets. In addition, ASC 350-30-35-4 states, in part:

If no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of an intangible asset to the reporting entity, the useful life of the asset shall be considered to be indefinite. . . . The useful life of an intangible asset is indefinite if that life extends beyond the foreseeable horizon — that is, there is no foreseeable limit on the period of time over which it is expected to contribute to the cash flows of the reporting entity.

Because there is no limit on a digital asset’s foreseeable useful life, it is generally classified as an indefinite-lived intangible asset in accordance with ASC 350.2 Therefore, an entity should analyze the characteristics of the digital asset, as well as the related rights that are conveyed to the holder, to determine the asset’s appropriate classification. For example, an entity needs to consider whether it owns the digital asset or whether it has a right to obtain it. If the holder only has a right to the underlying asset, the holder would need to use judgment to determine how to classify the digital asset. The entity may also need to evaluate whether the right to receive a digital asset includes an embedded derivative under ASC 815. In addition, there may be limited circumstances in which digital assets are (1) held for sale in the ordinary course of business and thus considered inventory (as in the case of a broker3) or (2) accounted for as an investment by an investment company.4

The most common digital assets today (e.g., BTC, ETH) are not within the scope of any other applicable GAAP and are accounted for in accordance with ASC 350 since they lack physical substance and, accordingly, meet the definition of an intangible asset. Once an entity determines that a digital asset meets the definition of an intangible asset, it would evaluate whether the digital asset is within the scope of ASC 350-30; the existing guidance in ASC 350; or ASC 350-60, which is the new subtopic added as a result of the recent FASB project and ASU 2023-08. Before the required effective date of ASU 2023-08, an entity may apply the guidance in ASC 350-30 to all digital assets within the scope of ASC 350; however, once ASU 2023-08 becomes effective, an asset within the ASU’s scope must be accounted for under ASC 350-60 instead of ASC 350-30. See Chapter 7 for more information about the effective date of ASU 2023-08.

For the remainder of this publication, the following terms will be used:

A digital asset that meets the definition of an intangible asset will be referred to as a “crypto asset.”
A crypto asset that is within the scope of ASU 2023-08 will be referred to as an “in-scope crypto asset” or “ASU 2023-08 crypto asset.”
A crypto asset that is within the scope of ASC 350-30 (i.e., that is not within the scope of ASU 2023-08) will be referred to as an “out-of-scope crypto asset” or “ASC 350-30 crypto asset.”

Footnotes

At the 2021 AICPA & CIMA Conference on Current SEC and PCAOB Developments, John Vanosdall, deputy chief accountant in the SEC’s Office of the Chief Accountant, noted that digital assets that are not securities and are not subject to specialized industry guidance are likely to be accounted for as indefinite-lived intangible assets under ASC 350. For more information, see Deloitte’s December 12, 2021, Heads Up.

ASC 940 includes accounting guidance related to brokers and dealers in securities. Under ASC 940, a broker-dealer’s security positions may be classified as inventory. If an entity concludes that it is within the scope of ASC 940, it should consider discussing this conclusion with its accounting advisers.

Entities within the scope of ASC 946 (i.e., investment companies) that hold cryptocurrencies as investments should account for them as they would any other investment that they measure initially and subsequently at fair value.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.