4.1 Crypto Assets Classified as Intangible Assets That Are Not Within the Scope of ASU 2023-08

An entity needs to assess all events and circumstances that could potentially indicate that its crypto assets are impaired. For example, most crypto assets are traded on an exchange with observable prices in an active market. If the price of a crypto asset traded on an exchange declines below the cost paid by the entity to acquire the asset or the crypto asset’s current carrying amount, the entity’s crypto asset may be impaired. ASC 350-30-35-18B and 35-18C include further examples of relevant facts and circumstances for entities to consider when assessing whether it is more likely than not that their crypto asset holdings have been impaired.

Once it has identified a potential impairment indicator, an entity will need to perform a quantitative impairment test to compare the asset’s fair value with its book value. If the book value is greater than the fair value, the entity should record the asset at its fair value by recognizing an impairment charge related to the crypto asset in the amount of the difference between the fair value and the carrying value. (See Section 4.3 for considerations related to an entity’s principal market used to determine its crypto assets’ fair value.) The impairment charge is recognized in earnings in a manner similar to impairment charges related to other indefinite-lived intangible assets. As with other intangible assets, once the impairment charge related to a crypto asset has been recognized, it cannot be reversed, even if the fair value of the crypto asset later recovers to a value greater than its initial cost basis or carrying amount.

ASC 350 requires entities to evaluate the impairment of indefinite-lived intangible assets at the appropriate unit of account. Under ASC 350-30-35-21, “[s]eparately recorded indefinite-lived intangible assets, whether acquired or internally developed, shall be combined into a single unit of accounting for purposes of testing impairment if they are operated as a single asset and, as such, are essentially inseparable from one another.” Because entities can engage in transactions with individual units or fractions of a unit (i.e., one BTC or a fraction of a BTC), it is likely that each unit of the crypto assets held by the entity constitutes a separate unit of account. Units of account for crypto assets with the same cost basis may be combined if they were acquired at the same time or were both previously impaired. How an entity determines its unit of account for its crypto asset holdings ultimately depends on the specific facts, circumstances, terms, and conditions that apply to its holdings. An entity will need to keep detailed records regarding the cost basis and book value of its crypto asset holdings for impairment testing purposes.

Question 7 of the AICPA Practice Aid asks how an entity should determine the unit of account when assessing the impairment of digital asset holdings accounted for as an indefinite-lived intangible asset. The response to Question 7 notes the following:

 

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Impairments and Non-GAAP Measures

In addition to focusing on measuring the impairment of crypto assets, the SEC has been challenging registrants that reverse impairment charges on crypto assets when presenting non-GAAP measures. The SEC believes that reversing impairment charges when providing non-GAAP measures would be inconsistent with the general principle of Regulation G, Rule 100, which prohibits misleading non-GAAP measures. See Deloitte’s Roadmap Non-GAAP Financial Measures and Metrics for further considerations.

Given these recent restatements and the AICPA’s guidance on measuring and presenting the impairment of crypto assets, entities should carefully evaluate their impairment methods and non-GAAP reporting policies when accounting for and reporting on crypto assets.

Impairments — Intraday Pricing

During the first quarter of 2023, we observed restatements by SEC registrants in connection with the application of the impairment guidance on intangible assets in ASC 350. The restatements involved the registrants’ use of a spot price at a standard cutoff time rather than their use of the lowest observable intraday fair value of the digital assets in accordance with ASC 350-30-35.

The response to Question 6 in the AICPA Practice Aid provides (along with the response to Question 5) nonauthoritative guidance on impairment of crypto assets and notes that “[i]mpairment testing of an indefinite-lived out-of-scope crypto intangible asset is required whenever events or changes in circumstances indicate it is more likely than not that impairment has occurred” (emphasis added); as a result, there could be an impairment loss within a single day. Further, Section D.1 of AU Chapter 2 in the AICPA Practice Aid, which discusses an entity’s audit processes and controls, specifies the following related to the date and time of the valuation measurement:

Unlike traditional markets, the market for digital assets does not close, and an entity may inappropriately measure its digital assets at times of the day that are not consistent across reporting periods . . . and not in accordance with its valuation policies. This, in combination with the significant intra-day volatility of digital assets, could result in a material misstatement of valuation.

In addition, Question 20 in the AIPCA Practice Aid addresses how entities should consider the impact of activity through the end of the reporting date when determining the fair value of the digital asset or assessing whether potential impairment triggers exist.