Chapter 7 — Common Issues Related to Cash Flows

7.15 Digital Assets

Other than the guidance in ASU 2023-08 (discussed below), there is no explicit U.S. GAAP guidance on accounting for digital assets, including how an entity classifies its receipts of and payments for such assets in the statement of cash flows. As a result, an entity must apply judgment when classifying the cash flows associated with transactions involving such assets.

Changing Lanes

In December 2023, the FASB issued ASU 2023-08, which addresses the accounting and disclosure requirements for certain crypto assets. The new guidance provides guidance on, among other topics, cash flow presentation related to the sale of crypto assets received as noncash consideration in the ordinary course of business. The amendments require entities to present, as operating cash inflows, the cash receipts from the nearly immediate sale of crypto assets that were “received as noncash consideration in the ordinary course of business (for example, in exchange for goods and services transferred to a customer).” In this situation, an entity would, in the normal course of business, receive crypto assets as noncash consideration for a revenue-generating activity (e.g., mining). According to ASC 230-10-45-27A, the phrase “nearly immediately” means “a short period of time that is expected to be within hours or a few days, rather than weeks.”

For all entities, the ASU’s amendments are effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted. If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period.

7.15.1 Purchases and Sales of Crypto Assets

We generally believe that because crypto assets are classified as intangible assets, an entity should classify cash flows resulting from the purchases or sales of such assets as investing activities in accordance with ASC 230-10-45-13(c) and ASC 230-10-45-12(c), respectively. However, ASU 2023-08 amends certain cash flow presentation guidance related to crypto assets within its scope. ASC 230-10-45-27A (added by ASU 2023-08) states that “[i]f crypto assets accounted for in accordance with Subtopic 350-60 are received as noncash consideration in the ordinary course of business (for example, in exchange for goods and services transferred to a customer) and converted nearly immediately into cash, the cash received shall be classified as operating activities. In this context, the term nearly immediately refers to a short period of time that is expected to be within hours or a few days, rather than weeks.” Entities that plan to classify the cash flow activity from this type of arrangement within operating activities are encouraged to consult with their accounting and financial advisers.

In some cases, an entity may purchase goods or pay for services by using crypto assets that are classified as intangible assets. In a manner consistent with the principles discussed in Chapter 5, a payment made for a good or service by using a crypto asset would be presented as a noncash reconciling item in the reconciliation of net income to net cash flows from operating activities. A payment made for PP&E or another productive asset would be disclosed as a noncash investing activity.

7.15.2 Safeguarding Requirements

In March 2022, the SEC issued SAB 121, in which the SEC staff provided its view that an entity that has an obligation to safeguard crypto assets should record a liability and corresponding asset on its balance sheet at the fair value of the crypto assets. See Deloitte’s Roadmap Digital Assets for more information about SAB 121.

Since the initial recognition of a safeguarding liability and safeguarding asset is a noncash transaction whose nature is generally categorized as operating (e.g., cash flows resulting from custodial services provided by an asset manager enter into the determination of the asset manager’s net income), such recognition would not be presented in the statement of cash flows or disclosed in accordance with ASC 230. If, in subsequent periods, a difference arises between the remeasurement of the safeguarding liability and the safeguarding asset (e.g., because of a loss event9), we believe that it is acceptable for an entity to present this difference on a net basis as a reconciling item within its net cash flows from operating activities.

Example 7-24

Entity A is a broker-dealer that is required to record a safeguarding liability and safeguarding asset on its balance sheet in accordance with SAB 121. At initial recognition, the safeguarding liability and safeguarding asset were both $100 million. Since they are both part of A’s operations, A would not present their initial recognition in its statement of cash flows.

In year 2, A remeasured the safeguarding liability and safeguarding asset. As a result of a loss event, the safeguarding asset was remeasured at $80 million while the safeguarding liability remained at $100 million. The $20 million loss would be presented as a reconciling item within the reconciliation of net income to net cash flows from operating activities in year 2.

Changing Lanes

On January 23, 2025, the SEC released SAB 122 to rescind the previous guidance in SAB 121. Accordingly, an entity should remove from its balance sheet any safeguarding obligation and corresponding asset that it was previously required to recognize under SAB 121. However, because the initial recognition of the safeguarding obligation and corresponding asset under SAB 121 is not presented in the statement of cash flows, we do not believe that the rescission of SAB 121 will affect an entity’s statement of cash flows.

Full retrospective application of SAB 122 is required for annual periods beginning after December 15, 2024, but entities are permitted to early adopt SAB 122 in any interim or annual financial statement period included in filings with the SEC on or after January 30, 2025. While there is a short period before entities are required to formally adopt SAB 122, we have observed that most entities have chosen early adoption. In certain instances, an entity may still be applying SAB 121; however, such cases are expected to be rare. For more information, see Deloitte’s Roadmap Digital Assets.

7.15.3 Crypto Asset Lending

At the 2022 AICPA & CIMA Conference on Current SEC and PCAOB Developments,10 the SEC staff indicated that it generally believes that, in crypto asset lending transactions, the lender transfers control of the crypto asset and should therefore derecognize it if the transfer meets the requirements for derecognition.11 In such situations, the lender would derecognize the crypto asset and recognize an asset (i.e., loan receivable) that reflects its right to receive the crypto asset from the borrower at the end of the loan period. The lender would also recognize an allowance for credit losses related to the asset recognized from the exchange at the inception of the loan and at the end of each subsequent reporting period. In addition, the lender may earn a fee during the loan period that is commonly paid in the form of crypto assets.

We believe that it would be acceptable to present the exchange of the loaned crypto asset for the loan receivable as a noncash investing activity since it is analogous to making and collecting loans. Any gain or loss on the exchange12 related to the recognized asset should be presented as a noncash reconciling item in the reconciliation of net income to net cash flows from operating activities. In addition, since lender fees received in the form of crypto assets reflect noncash income, we believe that it is acceptable for a lender to present the crypto assets received as a noncash reconciling item in the reconciliation of net income to net cash flows from operating activities.

Example 7-25

Entity A enters into an agreement with Entity B in which A will lend B 200 units of bitcoin that is due one year from the loan commencement date. Entity A concludes that it should derecognize the bitcoin assets from its financial statements. Upon such derecognition, A simultaneously recognizes a loan receivable that reflects the fair value of the bitcoin assets lent, adjusted by an allowance for credit losses, and presents this noncash exchange as a noncash investing activity.

In connection with the loan, A charges B a fee of 2 percent per month and requires B to pay A 4 units of bitcoin each month for the 12-month duration of the loan. The bitcoin received by A related to the fees earned on the loan represents noncash consideration received and may be presented as a noncash reconciling item in the reconciliation of net income to net cash flows from operating activities.

In addition, A determines that the allowance for credit losses is $200,000. This allowance would be presented as a noncash reconciling item in the reconciliation of net income to net cash flows from operating activities.

Footnotes

The entity would factor in potential loss events (e.g., theft, loss of the private key, loss of the crypto asset, cybersecurity hacks) that could affect the measurement of the safeguarding asset. The occurrence of such a loss event could result in a difference between the safeguarding asset and the safeguarding liability.

See Deloitte’s December 18, 2022, Heads Up for a summary of highlights from the conference.

Entities need to consider various indicators of control and elements of asset derecognition when making this determination. For more information, see Deloitte’s April 25, 2023, Heads Up.

A gain or loss may be recognized as a result of (1) the difference between the carrying value of the lent assets and the fair value of the crypto asset loan receivable or (2) the initial and subsequent measurement of the allowance for credit losses on the crypto asset loan receivable.

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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.