Chapter 7 — Common Issues Related to Cash Flows

7.15 Digital Assets

There is no explicit guidance in U.S. GAAP on the accounting for digital assets, including how an entity classifies its receipts of and payments for such assets in the statement of cash flows. While the AICPA’s updated practice aid provides nonauthoritative guidance on the accounting for digital assets (see Deloitte’s April 25, 2023, Heads Up), it does not address issues related to the presentation of digital 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.

The guidance discussed in the sections below applies to crypto assets that are classified as intangible assets. In accordance with the AICPA’s updated practice aid, crypto assets are types of digital assets that:

[F]unction as a medium of exchange and
[H]ave all of the following characteristics:
1. They are not issued by a jurisdictional authority (for example, a sovereign government).
2. They do not give rise to a contract between the holder and another party.
3. They are not considered a security under the Securities Act of 1933 or the Securities Exchange Act of 1934.

The practice aid further states that the above characteristics “are not all-inclusive, and other facts and circumstances may need to be considered. Examples of crypto assets meeting these characteristics include bitcoin, bitcoin cash, and ether.”

Changing Lanes

In March 2023, the FASB issued a proposed ASU on the accounting for and disclosure of certain crypto assets. The proposed ASU addresses, among other things, cash flow presentation related to the sale of crypto assets received as noncash consideration in the ordinary course of business. The proposed amendments would 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. 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 the proposed ASU, the phrase “nearly immediately” means “a short period of time that is expected to be within hours or a few days, rather than weeks.” See Deloitte’s March 27, 2023, Heads Up for additional information about the proposed ASU. We encourage entities to continue to monitor the FASB’s project on crypto assets for developments related to the presentation of digital assets in the cash flow statement.

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, we have observed that depending on the nature of activities associated with the purchase and sale of crypto assets, entities have classified cash flows from such purchases and sales as operating activities. 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.

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 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 7-22

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,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 a case, 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 7-23

Entity A entered 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.

Confidential and Proprietary — for Use Solely by Authorized Personnel

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.