3.11 Digital Assets

3.11.1 ASU 2023-08 on the Accounting for and Disclosure of Crypto Assets (Codified in ASC 350-60)

Examples of SEC Comments

You disclose that you account for your bitcoin holdings as indefinite lived intangible assets and record impairment charges whenever the carrying value of bitcoin holdings on the balance sheet exceeds their fair market value. It appears that you did not update the disclosure in this section to reflect your adoption of ASU 2023-08. As you adopted this guidance in an interim period, please update your future forms 10-Q in the year of adoption to also include the annual period crypto asset holding disclosures in ASC Topic 350-60-50.
We note that you early adopted ASU 2023-08 effective January 1, 2023 and updated your disclosures for this material change in accounting principle. Please revise future filings to disclose the method used to determine your cost basis for computing gains and losses (for example: first-in first-out, specific identification, average cost, or another method used) as required by ASC 350-60-50-2a.

In December 2023, the FASB issued ASU 2023-08, which addresses the accounting and disclosure requirements for certain crypto assets. Before the ASU’s issuance, an entity accounted for certain digital assets as indefinite-lived intangible assets in accordance with ASC 350 (i.e., the assets were measured at historical cost less impairment). Stakeholders had raised concerns that, among other factors, this intangible asset model (1) did not faithfully represent the economics of crypto assets and (2) made the recognition of impairments needlessly complex by requiring entities to use a crypto asset’s lowest observable fair value within a reporting period. Accordingly, ASU 2023-08 requires entities to subsequently measure certain crypto assets at fair value, with changes in fair value recorded in net income in each reporting period. In addition, entities are required to provide additional disclosures about certain crypto asset holdings.

The ASU’s amendments are effective for all entities for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years, with early adoption permitted for periods for which financial statements have not yet been issued (or made available for issuance). In the year of adoption, entities should include both (1) annual disclosures and (2) interim disclosures in the first interim period after adoption and in each subsequent interim period of the adoption year. Further, under Regulation S-K, Item 302(a), if a registrant reports a material retrospective change (or changes) “for any of the quarters within the two most recent fiscal years,” the registrant must disclose (1) an explanation for the material change(s) and (2) summarized financial information reflecting such change(s) for the affected quarterly periods, including the fourth quarter.

There are certain presentation and disclosure requirements to be met on an annual and interim basis for all crypto assets within scope of ASC 350-60. These requirements include, but are not limited to, disclosing the “method [an entity] used to determine its cost basis for computing gains and losses,” as noted in ASC 350-60-50-2(a). For more information about the presentation and disclosure requirements of ASC 350-60, see Sections 6.2 and 6.3 of Deloitte’s Roadmap Digital Assets.

3.11.2 Mining

Examples of SEC Comments

Please provide us your analysis supporting your revenue recognition policy for your mining pool participation activities. In your response, where appropriate, reference for us the authoritative literature you relied upon to support your accounting.
In future filings, please include a comprehensive breakeven analysis for your bitcoin mining operations or any other crypto assets that you earn or mine that compares the cost to earn or mine one crypto asset with the value of the crypto asset.

A “proof-of-work” blockchain protocol, such as the bitcoin (BTC) blockchain, is one in which blocks of transactions are validated by solving a cryptographic algorithm through a process referred to as mining. Those that perform mining activities are referred to as miners.

A mining pool is a group of miners organized and operated by a third party (referred to as a mining pool operator) that pools the resources of individual miners to share their processing power over a network to solve blocks. Joining a mining pool is a way to decrease the risk of an individual miner’s mining activities by reducing the variability in timing of earning mining rewards. The block rewards and transaction fees earned by the mining pool are allocated to the mining pool participants on the basis of an agreed-upon payout method (often proportionate to the participant’s share of the total mining pool hash rate provided).

Question 28 of the AICPA Practice Aid Accounting for and Auditing of Digital Assets provides guidance on how a mining pool participant should account for the mining pool arrangement. The mining pool participant should first evaluate whether the arrangement between the entity and the mining pool operator includes a lease within the scope of ASC 842. The mining pool operator’s ability to dictate when the mining pool participant can use its mining equipment could indicate that the mining pool participant is leasing the mining equipment to the mining pool operator. If the entity concludes that the mining pool arrangement contains a lease, the entity would apply the lessor accounting guidance under ASC 842. If there is a lease, the mining pool participant’s customer for the lease will generally be the mining pool operator, which means that the mining pool operator would be the principal to the mining activities undertaken in the mining pool.

If the mining pool arrangement does not contain a lease, the mining pool participant will then need to determine whether it is providing its mining services to the mining pool operator or to the blockchain or blockchain participants. To determine the counterparty in the arrangement, the entity would need to determine whether it or the mining pool operator is the principal for the mining activities performed on the blockchain in accordance with the principal-versus-agent guidance in ASC 606. The principal in the arrangement is the one that controls the mining services being performed on the blockchain. See Chapter 10 of Deloitte’s Roadmap Revenue Recognition for more information about principal-versus-agent considerations. For more information about mining pool revenue recognition and SEC comments related to mining pool participants, see Sections 8.4.1.2 and 8.4.1.3 of Deloitte’s Roadmap Digital Assets.

Although the disclosure of break-even analysis is not required under U.S. GAAP, the SEC staff often comments that the break-even price in digital asset mining is the point at which the revenue generated from mining equals the total expenses incurred. Essentially, it is the minimum price that digital assets need to reach for a miner to cover its costs without incurring losses. Break-even analysis considers both initial capital expenditure and ongoing operational costs. Recent SEC comments on break-even analysis include requests for registrants to provide a comprehensive break-even analysis of BTC operations that (1) compares the cost of mining with the value of the crypto assets and (2) explains how the cost of purchasing mining equipment, including any related financing costs, is factored into the break-even analysis. The break-even analysis should also identify and explain all relevant inputs used.

3.11.3 Crypto Assets Received for Goods or Services Provided

Example of an SEC Comment

Per ASC 606-10-32-21, you should measure the estimated fair value of the noncash consideration at contract inception. . . . You disclose . . . that the non-cash transaction consideration received in the form of bitcoin is measured at fair value on the date received, which is not materially different than the fair value at contract inception. Please explain how you are able to determine that the fair value of the bitcoin on the date received is not materially different than the estimated fair value of the bitcoin required to be measured at contract inception under ASC 606-10-32-21.

When an entity accepts crypto assets in exchange for goods or services provided, the entity will need to use judgment to determine how to account for the crypto assets received. The entity will first need to determine whether it has a contract with a customer, as defined in ASC 606. If the entity determines that the transaction is a contract with a customer, the transaction is within the scope of ASC 606. Under ASC 606, the entity would account for the crypto assets received as noncash consideration and, therefore, the crypto assets must be measured at fair value at contract inception. If the crypto assets are received at a date later than contract inception, changes in the fair value of the crypto assets after contract inception do not affect the amount of revenue recognized. However, an entity should assess whether the contract is or contains a derivative that should be accounted for separately from the right to receive crypto assets.

Subsequent changes in the fair value of the crypto assets (after receipt of the crypto assets) would not affect the amount of revenue recognized for the goods or services provided. For more information about noncash consideration, see Section 6.5 of Deloitte’s Roadmap Revenue Recognition. If the transaction is not a contract with a customer, the entity would need to consider other accounting guidance to apply to the transaction, which could include ASC 610-20 (on gains and losses from the derecognition of nonfinancial assets), ASC 845 (on nonmonetary transactions), or applying ASC 606 by analogy.

The SEC staff has issued several comments asking registrants how they determined (1) that the fair value of a crypto asset at contract inception is not materially different from the fair value of the crypto asset on the date received and (2) whether the contract contains a derivative that should be accounted for separately from the right to receive the crypto asset. For more information related to receiving crypto assets in exchange for goods or services, see Section 3.2.3 of Deloitte’s Roadmap Digital Assets.