Navigating the complexities of crypto accounting is crucial for any institution operating in digital assets, including exchanges, funds and businesses accepting crypto as a means of payment for launching a Web3 initiative.
Proper crypto accounting not only ensures compliance and prevents painful consequences but also instills confidence in stakeholders and investors. It allows institutions to maintain transparent financial records, identify potential risks and make informed decisions in the rapidly evolving crypto landscape.
As the regulatory environment surrounding cryptocurrencies continues to evolve, staying on top of accounting best practices becomes paramount for institutions to navigate challenges and seize the opportunities in a dynamic market.
Maintaining a robust control environment, accurate reporting based on guidelines from the Financial Accounting Standards Board for digital asset transactions, having tools to effectively value transactions and report portfolio activity on your financial statements, and staying informed about upcoming accounting changes and meticulous record-keeping to comply with FASB guidelines will allow businesses to confidently manage crypto accounting without sacrificing operational efficiency.
One of the most important considerations when it comes to operationalizing your crypto accounting is staying up to date on FASB’s guidelines. FASB provides authoritative accounting guidance and criteria for how companies in the U.S. should record their digital assets and cryptocurrency transactions.
Understanding these guidelines is integral for any business that wants to accurately track its crypto portfolio and appropriately report any gains or losses. Staying informed on the latest updates to FASB accounting standards and consulting a certified accountant can help ensure a business remains compliant with current rules and regulations.
Historically, cryptocurrencies have been treated as intangible assets under U.S. GAAP. This requires companies to track the cost basis (i.e., purchase price) of each individual lot, and adjust the book value of those crypto holdings downward for any impairment event. An impairment event occurs when the price of a crypto asset falls below its purchase price.
When that happens, a company records an impairment loss and writes the book value of the asset down to the lowest valuation point since the asset was acquired. Assets that have been written down can only be written back up when they are sold or disposed of. This has resulted in a misalignment of crypto accounting with the economic realities of these assets.
FASB is in the process of updating crypto asset accounting. Under the new proposed guidelines, companies would account for crypto holdings at their fair value, with any changes in fair value flowing through earnings. This proposed update represents a significant change in accounting for crypto assets and is a big step in the right direction. In addition, companies would need to provide new accounting disclosures to users of financial statements to help them understand a company’s crypto holdings and activity.
In addition to understanding FASB’s guidelines, businesses should also be aware of different methods for pricing their digital assets. Accounting guidance outlined in ASC 820 requires companies to follow certain rules for determining fair value measurements.
Among those rules, companies need to identify the appropriate principal market that should be used to pull crypto asset pricing. It’s important to understand the nuances of these rules and consider all available principal markets to determine which one is most appropriate for a business’s accounting and fair value reporting needs.
Finally, businesses should be sure to maintain a robust control environment and keep meticulous records of all their cryptocurrency transactions. Tracking each purchase, sale, trade, income, expense, DeFi or other activity will help ensure that the crypto portfolio remains accurate and compliant with FASB guidelines. In addition, having proper controls in place to support accurate, timely and complete information as part of your accounting process is critical.
With the proper tools and knowledge, businesses can operationalize their crypto accounting systems in the most effective way possible. From tracking transactions to investing in the right tools, there are several different steps businesses can take to ensure their crypto portfolios remain accurate and comply with the latest regulations.
With the help of these tips, businesses can achieve a better understanding of how to properly manage their digital assets and confidently operationalize their crypto accounting.
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