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 April 6, 2022 (updated July 28,
2022), Financial Reporting
Alert 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 event10), 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 7-22
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.
7.15.3 Crypto Asset Lending
At the 2022 AICPA & CIMA Conference on Current SEC and PCAOB
Developments,11 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.12 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 exchange13 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 7-23
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
10
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.
12
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.
13
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.