With high-profile firms such as MicroStrategy, Tesla and Twitter all announcing major investments in Bitcoin in recent months, it looks like digital assets have come of age. But investing in them as part of a diversified treasury cash strategy has implications for finance and accounting. With all still lacking clear accounting rules, treasurers looking for investment need to pay close attention.
Deloitte’s report entitled Corporates investing in crypto: considerations regarding allocations to digital assets has recently been published to help steer treasurers through their initial explorations of Bitcoin or any other digital asset holdings.
The high level guidance covers a broad sweep, from accounting and reporting to tax considerations, risk and internal controls. It demonstrates the need for caution by highlighting specific challenges. For example, accounting treatment for cryptocurrencies under US GAAP (generally accepted accounting principles) requires write-downs of losses (likely given their volatility) yet does not allow for ‘write-ups’ of gains. Investors reviewing financial statements may not, therefore, see appreciating digital assets unless companies adopt a robust non-GAAP financial disclosure system.
In the company of three specialists from Deloitte, TMI sought some clarification on the impact that a digital asset such as Bitcoin may have on finance and accounting treatments.
Rise of digital assets
Traditionally, corporate treasuries have managed cash conservatively. Massey says that while there will always be conservatism in corporate treasury in terms of investment strategies, the increase in the price of the asset (from $29k per Bitcoin in December 2020 to as high as $57k in February 2021), has certainly piqued the interest not just of treasurers but also of CFOs and corporate boards, especially in this sustained low-interest rate environment.
“Well-known companies investing in this asset class, as well as financial institutions showing interest in holding or brokering these assets and payment providers, have given more credibility to the asset class than ever before,” Massey observes. “The final piece that may solidify this as a stable and credible asset class is the use of digital assets as a normal payment methodology plus the added benefit as programmable money.”
Tax and accounting variation
For those holding Bitcoin for investment purposes, Massey says the tax treatment of Bitcoin varies by different taxing authorities around the world. “In most jurisdictions, it is viewed differently than other investment type assets in that it is deemed ‘general property’ and fungible,” he explains. “Bitcoin requires a higher degree of operational care to segregate tranches of investments with varied basis in order to identify which is sold, the associated basis, and the resulting gain.”
Park, who specialises in consolidation, financial instruments and digital assets, adds that as with tax, the accounting rules also vary by jurisdiction. “Under both US GAAP and IFRS [International Financial Reporting Standards], Bitcoin is treated as an intangible asset. The resulting accounting and presentation may be different than one would expect for an investment, which is often treated and transacted like a financial asset.”
Bitcoin business payments
Do the rules differ when Bitcoin is used for business payment purposes? The short answer is yes, says Massey. For tax purposes, he explains that, again, each jurisdiction is different, but one common theme is that Bitcoin is not viewed as a currency. Gains and losses therefore fall outside the established tax rules of foreign currency.
“This leaves operational and tax complexities in determining character – capital versus ordinary asset – and basis tracking,” he notes. “What’s more, very few tax authorities accept Bitcoin as a form of payment, which means that withholding taxes for things like payroll still need to be remitted in fiat currency, even when the underlying payment to an employee is in Bitcoin.” Again, clearly there are many operational complexities of which treasurers should be aware.
On the accounting side, Park notes that using Bitcoin as a means of payment – whether accepting Bitcoin from customers for goods or services sold or paying vendors or employees in Bitcoin – can get complex when using the asset in a manner similar to a financial asset while having to account for it as an intangible asset.
“The transaction price may be different in value than the ultimate amount received from a customer,” she explains. “This, in turn, impacts the amount of revenue a company can record, and could also lead to derivatives that capture the volatility of the price of Bitcoin.”
These amounts, while all related to a single transaction, will often be presented in different places on a company’s financial statements and, warns Park, “can require consideration of how to best disclose and describe the resulting accounting and presentation”.
Technical make-up
“As Bitcoin establishes itself as a credible investment asset class, treasurers need to understand it, at a minimum, as well and as thoroughly as any other asset class in which they might invest,” urges Davis, a specialist in accounting and internal controls, technology, media, and telecommunications.
“Given that Bitcoin has the ability to be a payment methodology that treasury will need to support, the treasurer needs to understand the underlying capabilities of the technology to provide more efficiency and effectivity in the payments requirements of the entire organisation – from customer receipts to employee and payroll payments.”
Custody considerations
The first question for treasurers taking the plunge should be whether to self-custody or have a third-party custody the crypto, says Davis. “Given the expertise required for self-custody, we predict most treasurers will elect to use a third-party custodian.”
The second decision is, therefore, to choose the custodian, and for this, treasurers will want to consider elements such as reputation, ability to offer leading practice controls, and the adoption of protections in the event of disaster, such as insurance, and backups. He further advises that “treasurers will need to design ongoing monitoring procedures that respond to risks specific to each digital asset they are invested in”. While digital assets such as Bitcoin appear to be settling into a long and interesting relationship with corporates, it’s clear that treasurers will need to do their homework, not least around the tax and accounting implications, before taking the plunge. Look out for further explorations of the key issues on the TMI website and app.
