Despite its rapid growth, the crypto industry has yet to establish a standard accounting standard to gauge its market activities. As a result, set guidelines for the broader financial ecosystem are applied to the digital asset industry.
However, most have adopted the International Financial Reporting Standards (IFRS) and the Generally Accepted Accounting Principles (GAAP) framework. Balance sheets and income and cash flow statements are a company’s financial map.
While income and cash flow statements reveal a company’s assets and economic health regarding equity and debt over a specific period, a balance sheet shows the firm’s assets and financial health regarding equity and debt. In today’s digital age, accounting for cryptocurrency transactions that could influence a company’s financial trajectory has become vital, making them an essential component of this financial representation.
A Case For A Balance Sheet
A balance sheet is more than just a financial document; it contains vast information and benefits for a company. It is a financial time machine that lets you compare your firm’s annual performance, providing a tangible measure of growth and progress.
Additionally, a balance sheet is typically created at the end of a specific reporting period. Balance sheets serve as a tool for calculating critical financial ratios.
Consider the debt-to-equity ratio, which acts as an economic crystal ball, revealing whether your company can settle its debts with its equity. Furthermore, it contains the information required for other critical ratios, such as the comparison of current assets and current liabilities, which portrays your company’s ability to cover its debts within a year.
In essence, a balance sheet is your financial compass, providing insights and tools to navigate the course of your business at any time.
Incorporating Crypto Assets On A Balance Sheet
Preparing a balance sheet has always been a complex issue, and one frequently asked question is, “Where should cryptocurrencies be accounted for?” As previously stated, neither the GAAP nor the IFRS have comprehensive guidelines to account for cryptocurrency gains.
Since cryptocurrencies are assets, the basic principles of asset accounting should guide you when incorporating digital asset transactions into your balance sheet. Here are some guidelines to consider:
When Buying Digital Assets With Fiat Currencies
Accounting for crypto trading activities is similar to managing stock trading activities. When you buy assets like Bitcoin (BTC) or Ethereum (ETH), you should record their fair market value on your balance sheet as of the purchase date.
This transaction will appear as a debit on your assets account, reflecting the value of your digital tokens. Since you also purchased these cryptocurrencies with fiat currency, your cash account should show a credit entry for the purchase price of the acquired crypto assets where applicable.
When Selling Crypto Assets For Fiat
Accounting entries for the sale of crypto assets follow a specific pattern. The assets account, which represents your cryptocurrency holdings, will be credited, indicating that your crypto assets have decreased.
Simultaneously, the cash account will be debited with the amount of fiat currency received from the sale, representing the increase in your cash holdings due to the sale.
Documenting Unrealized Losses
According to the GAAP guidelines, the accounting treatment for intangible assets, including cryptocurrencies like BTC, states that impairment losses cannot be reversed, even if the asset’s value recovers pre-impairment levels. For example, if a company buys BTC at a fair market value of $500,000 and the value drops by $100,000, it must record the loss in its financial statements.
This implies reducing the balance sheet carrying amount of its cryptocurrency holdings to reflect the asset’s decreased value accurately.
Taxable Scenarios Under IFRS and GAAP
Under the GAAP and IFRS, taxable events that prompt income tax liabilities based on an asset’s fair market value can differ. It is important to note that accounting standards and tax regulations differ by jurisdiction. So, those specifics may vary.
However, some everyday taxable events that may result in income tax obligations based on an asset’s fair market value include:
- Crypto staking gains
- Crypto Mining Income
- Hard forks and Air Drops
- Earnings from interests
In conclusion, balance sheets can be likened to the overall snapshot of a company’s financial status, similar to an economic time capsule that records every transaction from the source to the final destination.