Whether you’re already participating, investing, or just starting to explore, you’ll want to assess your digital assets strategy from a holistic perspective.
Cryptocurrency and other forms of digital assets are a rapidly evolving asset class, and they’re quickly becoming mainstream. These assets present attractive alternatives as a means of payment, and could also create new opportunities for yield generation in lending activities, staking, liquidity pooling, and more. As a result, companies are exploring how they can enter the digital asset space, and want to know the appropriate steps to prepare for such a move.
Whether you’re already participating, investing, or just starting to explore, you’ll want to assess your digital assets strategy from a holistic perspective. This article outlines several key considerations as you’re building out your organizational roadmap.
To explore the specific challenges of digital assets accounting, please read our article.
Currently, there isn’t any authoritative guidance tailored to digital assets under US generally accepted accounting principles (GAAP). In this absence, companies look to existing guidance as a way to bridge the gap. More specifically, companies have often looked to guidance related to cash, inventory, financial instruments, and intangible assets as potential accounting models for digital assets.
In late 2019, the AICPA released their practice aid, Accounting for and Auditing of Digital Assets, and published their opinion that digital assets should be treated as intangible assets for accounting purposes under US GAAP. Since that time, most companies have adopted this non-authoritative guidance, and do treat digital assets as intangible assets similar to goodwill.
For critics of this model, the primary concern is that digital assets aren’t recognized on a company’s balance sheet at their market value. Rather, they’re held at cost less any impairment that may have occurred as a result of downward price changes. As a result, balance sheets might not be an accurate reflection of the true economics being held by a company. In some instances—which are quite common due to the recent appreciating nature of these assets—you record the asset at significantly less than market value, which could lead to punitive outcomes for your company, or misleading outcomes for users of your financial statements.
For example, let’s say you buy BTC for $35,000 on January 10. The valuation drops to $30,000 on February 15, but rises to $40,000 by the end of the first quarter. In this example, your income statement for the quarter would show a loss of $5,000 even though the price at the end of the quarter has surpassed your original cost basis.
In reality, as of the balance sheet date, you’ve experienced an unrealized gain of $5,000; but by treating your digital asset holdings as an intangible asset, you’re forced to reflect a $5,000 loss. In this example, neither your balance sheet nor your income statement is an accurate reflection of the true economic position you hold.
This current accounting model can create a significant challenge to companies who are starting to dip a toe into digital assets—particularly if they aren’t prepared to manage the technical nature of tracking cost basis and impairment charges. They also run the risk of being unable to explain the actual economics of their digital asset activity to stakeholders.
For more information on the current standards, please read our Quick Guide to Digital Assets Accounting.
Traditional enterprise resource planning (ERP) systems aren’t equipped to deal with the complex and unique nature of digital assets. While these systems are adept for traditional accounting transactions, companies are in need of a more tailored solution that’s fit-for-purpose, and ready to manage the unique complexities that digital assets present. As a result, most finance and accounting departments are managing their holdings and transactions via manual reports, which makes information difficult to track in real-time, less secure and controlled, and inefficient.
Without the help of a robust ERP system, most companies manually track their digital asset activity. This solution is disorganized, and creates accuracy challenges due to the manual nature of the work and the high volume of activity. It can be easy to miss data, and it’s hard to ensure completeness of the data given the amount of transactions. The data can be fairly messy, disaggregated, and come from a multitude of sources. Since companies lack a tool to bring those sources together, there isn’t a holistic picture of its holdings.
The most commonly used tool for recording digital assets is an Excel spreadsheet—a situation ripe for human error. If a formula doesn’t calculate properly, or references a bad cell, the accuracy of your statements is at risk. This is often a risk companies are unwilling to take, with good reason, given the importance of financial reporting information and the amount of scrutiny it receives. Getting the answer right is non-negotiable.
Companies and their auditors need solutions that provide a robust control environment to identify errors and prevent them from occurring prior to publishing financial reports. This way, potential issues are flagged and highlighted to key stakeholders for investigation and review before they become a significant problem.
Financial reporting isn’t an area where surprises are appreciated and welcomed. With a robust system in place, companies can rest assured their financial reporting is built on a strong foundation.
The right system will include controls that can be programmed, tested, and automated. Ideally, the system has also passed SOC 1 Type 2 testing. In the absence of a system, the control environment suffers because behaviors aren’t always repeatable, and it could take much longer to spot an error or inconsistency.
The very nature of digital asset activity lends itself to a significant volume of transactions. It’s not uncommon for companies to have hundreds of thousands, millions, and even tens of millions of transactions. With such high volumes, companies need to have assurances that the population of transactions they are accounting for is complete—especially when most transactional activity is being treated in an automated manner.
Companies benefit from systems with automated control reports on transactional inflows and outflows, along with continual monitoring and exception reporting.
If your current ERP system doesn’t provide adequate tools or full functionality for digital asset accounting, what should you look for in solutions that will allow you to grow and scale your operations?
There’s basic system blocking and tackling functionality that should be readily available. This includes:
In addition to these capabilities, your system should be able to provide you with flexibility and extensibility throughout your business operations to handle significant volume and scale. As your business strategy and products advance, evolve, and lead to more types of transactions, you don’t want system constraints limiting your growth.
For example, if international growth is part of your expansion plan, you need a solution that’s able to accommodate international accounting rules along with US accounting rules. If your company is publicly traded, or has aspirations to become publicly traded, you’ll need a solution that provides US GAAP compliant results, impairment testing, and supports you through a rigorous audit process; it may even need to withstand SEC scrutiny. These examples highlight the need for support from strong technology partners and system providers as enterprise businesses mature.
When entering into, or expanding, a digital assets program, there are a wide number of stakeholders that should be involved. These stakeholders include representation from accounting, tax, legal, operations, treasury, compliance, and even a company’s board of directors.
Gaining alignment across organizational leadership is critical to the successful roll-out of a digital assets program, and the continued assurance that it’s meeting key objectives.
Many organizations find it’s critical to set up a digital assets working group that includes representation from each key business function. The working group is responsible for undertaking important readiness and diligence efforts to ensure successful adoption and roll out.
The working group could help establish policies and recommendations for the board. These policies can be crystallized into an organization-wide digital assets use plan that’s ultimately board-approved.
To assist you with planning, here’s a list of questions companies need to consider as they head into the digital assets arena:
Your company should consider the opportunity cost if it doesn’t implement a digital assets strategy. Down the road, if the trend continues and digital assets continue to increase in mainstream adoption, more people will choose this method of transaction and investment.
Pockets of customers may go to competitors if they want to use this form of payment. Potential sales would be lost.
Digital assets should also be a heavy consideration for treasury teams. If your company chooses to hold cash in digital assets, these investments could be deployed on decentralized finance (DeFi) platforms, and potentially generate an even higher return. Become informed of the yield generating opportunities that digital assets present, and use them to your advantage.
Before you make any decisions, conduct thorough research on tools that provide solutions to your company’s specific pain points, then move forward with a collaborative, consultative approach.
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