Balancing the volatility of cryptocurrencies through fair value accounting principles

When Bitcoin was launched in 2009, its price was one-tenth of a cent. Today, a single Bitcoin costs nearly $69,000. During its time on the market, the price has repeatedly risen or fallen by thousands of dollars in a single trading day. But in the world of cryptocurrencies, volatility is commonplace.

The unpredictability of digital assets is both a defining characteristic and a major challenge for investors and accountants. As companies increasingly add cryptocurrencies to their portfolios, understanding how to properly account for their fluctuating value is critical.

However, good accountants do not worry about volatility; an accountant’s job is simply to accurately report values ​​and assets. To achieve this, accountants should focus on implementing systems and processes to enable accurate reporting of crypto assets. Failure to do so may mean that the company is discouraged from adopting digital assets or that it is taking undue risks.

Accounting at fair value

At the end of 2023, the Financial Accounting Standards Board published an Accounting Standards Update which refines the accounting treatment of certain crypto assets, moving from a zero-cost impairment model to a fair value model. When assets are recorded at cost and tested for impairment annually, gains can only be recognized when the asset is sold. Therefore, the volatility mentioned above is not reflected in the value of the asset.

A fair value model, on the other hand, is more suitable for companies and accountants because it takes into account changes in value in real time. Bitcoin mining company Marathon Holdings reported Record profit in the first quarter and 184% year-on-year growth, partly because their earnings now reflect changes in their fair value.

US GAAP provides a framework for determining the fair value of assets in ASC 820. This guidance emphasizes the importance of accurate pricing to support the fair value measurement of an asset and introduces the concept of a Main market. Given the volatile nature of this asset class and the many different exchanges and markets on which these assets are traded, this concept is especially important for cryptocurrency pricing.

The FASB guidelines also require companies to report crypto activities as a separate line item on the balance sheet and income statement, in addition to the obligation Disclosure of individual assetsAlthough companies will not have to comply with the new accounting standards until December 15, 2024, early preparation will ensure that companies have an accurate picture of the value of their digital assets sooner rather than later.

MicroStrategy, a technology company and the largest corporate holder of Bitcoin, noticed the separation embedded in a cost impairment model in a letter to the FASB last year. Companies with significant crypto holdings are more likely to adopt fair value accounting than companies for which crypto assets are immaterial to the overall balance sheet.

Weaknesses in accounting

Companies that hold crypto assets generally face similar issues, including data aggregation and the ability to make data actionable. Companies need a bird’s eye view of all crypto assets, even if they are stored in different wallets and on multiple blockchains. They also need to ensure that the information retrieved is accurate, complete, and complies with accounting rules. Most importantly, companies need to be able to efficiently aggregate and analyze data so that the fluctuating value of digital assets can be easily and accurately communicated to business partners.

Put another way, it’s the accountants’ job to report accurate holdings to the entire company, and that can only be done with efficient and accurate technology. Technology is far more reliable than humans at performing such calculations. Instead of worrying about volatility, accountants working with cryptocurrencies should prioritize automation – through a system that has been SOC-tested. Imagine spending weeks manually aggregating data on a variety of crypto assets and calculating fair value, and making a mistake. That mistake could impact every aspect of reporting and leave the company with an incomplete and inaccurate picture of its digital assets (not to mention potential audit consequences).

But that doesn’t mean that cryptocurrency volatility shouldn’t be a cause for concern. While hedging instruments such as futures contracts and options offer a way to protect against adverse price fluctuations, their accounting treatment makes matters even more complex. In addition, regulators are paying increasing attention to the accounting treatment of cryptocurrencies, including Bitcoin. Regardless of the price of a particular currency, accountants must ensure they can make an accurate valuation of the assets at all times.

The conclusion

It is undeniable that cryptocurrencies continue to gain momentum. The Bitcoin ETF was approved in January and recorded a record 4.6 billion US dollars volume during its first day on the market, while an Ethereum ETF Approved at the end of MayFrom 4 June 2024, the The total market capitalization of Bitcoin ETFs was $78.27which shows the remarkable demand that exists. ETFs and the FASB guidelines are just two indicators and drivers for the continued adoption of cryptocurrencies. As more and more things are moved on-chain, companies will find themselves at an inflection point: Is our organization digital-first or not? Or more precisely, is our organization ready to jump headfirst into the mainstream and embrace the improved Payment security, Balance sheet diversification And Extended customer reach associated with the introduction of digital assets?

Now is the time for accountants to ensure they have the workflows and technology in place to accurately report crypto holdings so that companies can more easily invest and implement digital strategies in this growing market. An inaccurate or incomplete picture of an asset as volatile as cryptocurrency can cause hidden risks to multiply quickly.

While accountants should not be concerned about volatility itself, they must take seriously their duty to accurately report the ever-changing value of crypto assets. It is the accountant’s responsibility to ensure that the company has a complete and accurate picture of its on-chain investments. Accounting policies are helpful in this regard, but must be underpinned by workflows and systems that can aggregate, analyze, and report the value of crypto assets in real time.