Nonprofit Accounting Considerations for Crypto Assets
As cryptocurrencies become more popular and easier to access, many nonprofits are facing the decision to accept virtual currency or miss out on substantial donations. Other organizations are weighing the benefits of purchasing cryptocurrency as an investment strategy against the risks associated with its market volatility.
A nonprofit’s CPA can help guide them through the considerations that need to be evaluated when deciding to move forward with the purchase or receipt of crypto assets, especially when it comes to understanding how these transactions will impact the financial statement. With no formal accounting standard on crypto assets, the accounting considerations are often just as new and unique to the accounting profession as they are to the nonprofit recipient.
A crypto asset is a digital asset that uses cryptography to record, secure and verify transactions on a digital ledger called a blockchain, as well as to control the creation of new units of currency. In today’s market, there are several forms of crypto assets, with Bitcoin and Ethereum being the most widely recognized. Other forms of crypto assets are becoming popular, such as non-fungible tokens (NFTs) to buy and sell artwork and provide proof of ownership.
Financial Statement Implications
Because crypto assets lack physical substance and are not financial assets, they are treated as intangible assets on the financial statement and are recorded at acquisition cost. They are accounted for as indefinite-lived intangible assets and are subject to impairment testing on an annual basis or more frequently if changes in circumstances indicate it is more likely than not that the asset is impaired.
If impairment exists and it is concluded that the carrying amount of the crypto asset exceeds its fair value, the nonprofit should recognize an impairment loss for the amount equal to that excess. Once the impairment loss is recognized, the adjusted carrying value then becomes the new basis of accounting of the crypto asset.
Once impaired, the organization cannot recover the impaired value until the asset is sold and gain is realized as the difference between the sales price and the impaired value.
While “intangible assets” is, by definition, the category best suited to crypto assets, the treatment has its share of challenges:
- Volatility and impairment. While better-known crypto assets have increased in value over the past years, there have been major price swings. This leads to questions such as: When is the crypto asset impaired (during the volatility or only at the end of the reporting period)? And is there any subsequent-event consideration as the financial statements are getting ready to be issued?
- Auditing considerations. Most crypto assets are used as mediums of exchange in actively traded markets; however, there is no market close. At what point in time on any given day would the crypto asset be valued? In addition, since these assets exist in a digital wallet, which can be kept on a digital exchange (“hot wallet”) or offline (“cold wallet”), are auditors properly trained to audit these assets, as well as the blockchain?
These challenges may lead the CPA to consider a Generally Accepted Accounting Principles (GAAP) departure. However, in that instance, a modified opinion would be rendered, and the financial statement preparer would need to evaluate management’s rationale.
If the preparer agrees with management’s assertion that following GAAP would make the financial statement appear mis-leading, then one would be able to justify a qualified opinion as it would not be considered to be pervasive. If the preparer believes that management is making the argument to make their results look better, and the situation is pervasive enough to call management’s integrity into question, an adverse opinion may be warranted. For a more in-depth description of the different types of opinions, see AU-C Section 705.
As crypto assets are more readily accepted by vendors, and major governments complete the process of creating a digital currency, cryptocurrency donations will become increasingly more common. Nonprofit organizations will need their CPAs and other advisors to help them proactively evaluate the procedures and strategies that are needed to position their organizations on the receiving end of this profitable trend.
Jaime C. Rapps
Jaime Rapps, CPA, is an audit senior manager at Grassi Advisors & Accountants. He is a member of the NJCPA Nonprofit Interest Group.
This article appeared in the Winter 2021/22 issue of New Jersey CPA magazine. Read the full issue.