Ep. 118: Dr. Sean Stein Smith - Accounting for Cryptoassets

Contact Dr. Sean Stein Smith:
https://www.linkedin.com/in/dr-sean-stein-smith-dba-cpa-63307444/


Institute for Blockchain & Cryptoasset
Research: https://www.ibcr.info/


Bitcoin Is Hitting All Time Highs – How Are Organizations
Accounting For It?:
https://www.forbes.com/sites/seansteinsmith/2021/02/17/bitcoin-is-hitting-all-time-highs--how-are-organizations-accounting-for-it/



FULL EPISODE TRANSCRIPTMitch:
(00:00)
 Welcome back to Count Me In, IMA's podcast about all things
affecting the accounting and finance world. I'm your host Mitch
Roshong and this is episode 118 of our series. For today's
episode, we welcome back Assistant Professor at Lehman College,
Dr. Sean Stein Smith. Sean is also the founder of the Institute
for Blockchain and Crypto Asset Research and is a forbes.com
contributor in the area of crypto and blockchain. In previous
episodes, Sean has joined us to talk about different types of
blockchain and its uses. In the conversation you're about to hear
now, he talks with Adam specifically about accounting for crypto
assets. Let's head over and listen to their conversation
now.

Adam: (00:51)
So Sean in your recent article for Forbes, you talk about how
Bitcoin is hitting an all time high. What does this mean for an
organization's accounting as not every organization is ready to
move into cryptocurrency?

Sean: (01:02)
Yeah and so with the price of Bitcoin and all of the other
altcoins, really at their all time highs or very close to them,
all of this is having a huge impact on how companies are trying
to adapt, navigate in trying to onboard Bitcoin and other crypto
options as a form of doing payment. Right? Because it’s always
important to always keep in mind that even though Bitcoin
headline prices are obviously headline news, the original idea of
Bitcoin and the whole blockchain crypto asset space, it was to
develop basically a alternative way to conduct payments. And it
hasn't really played out that way and a big part of that is that
it's awfully hard for certain firms out there to actually take a
Bitcoin and other crypto as a form of payment. And I mean, there
are all kinds of IT issues on how the computer systems have to
interoperate, but the real issue from sort of our angle here is
that the current accounting treatment really makes no business
sense from a tax point of view, from a gap point of view, from a
IFRS point of view, there really is a issue and a headwind out
there that I believe and in all of the anecdotal conversations
that I have is honestly proving to be a big headwind that firms
are having a hard time trying to figure out how to one, take in
these agreements and then two, after they have them what to do
with them.

Adam: (02:40)
So is it kind of like the Wild West out there since there are no
crypto specific authoritative accounting standards?

Sean: (02:46)
Well, there are no crypto specific authoritative standards yet,
either under gap or IFRS but there is this consensus that
apparently has been reached, led by the top firms trying to sort
of get something out there right. And I totally understand why
they were trying to get some sort of consensus out there via the
white papers conversations, all the rest to have something to
answer external client questions with, but the current treatment
of Bitcoin and other crypto as a indefinite lived intangible
asset, which kind of sounds good on paper, right? Because Bitcoin
and other crypto are intangible and they have no fixed economic
life. But outside of that, it honestly makes no sense because it
doesn't really reflect the economic realities on the ground. And
I won't go into too too much depth here, but if I have an
indefinite, intangible asset on the books like Goodwill, I have
to do tests for possible impairment losses every time, a change
in the business outlook really causes that to happen. Okay great,
but if I have Bitcoin on the books, as we all know, Bitcoin and
other crypto assets have a little bit of price volatility in
there. And so if it drops by 20%, 10%, which it has done multiple
times, I, as the firm holding these assets now on the books, I
have to do the test for impairment, write down the asset books,
the cost. Okay, so far so good. But on the other hand, if and
when Bitcoin goes up by 10%, 20%, 200%, I can't do anything with
that under the current rules. So it's not so much the Wild Wild
West out there. It's almost artificially trying to fit a square
peg into a round hole Adam, right because I can't mark up
correctly the current market value of the assets that I hold, or
in other words, under the current accounting, consensus that has
been reached in the face of no crypto specific guidance, I'm
basically forced to hold these assets on the books at an
artificially lower level, no matter what happens outside in the
marketplace.

Adam: (05:29)
Now you mentioned impairment in that last answer, how does that
come into play with cryptocurrency? Could you go into a little
more detail?

Sean: (05:36)
Sure. And so probably the most obvious case as to how it could
come into play is if I received payment in Bitcoin at the end of
2020 or even early 2021, Bitcoin and the other altcoins out there
were on an upswing, right. They had all increased in price quite
a bit. During that back half of 2020, and into the first quarter
of 2021, obviously there are some pullbacks and that's where the
issue really does pop up. So there was one specific weekend early
in the first quarter of 2021 where the price of Bitcoin dropped
over 20%. And so if I, as a firm head chosen to take Bitcoin as a
form of customer payment and then also chosen to hold those
Bitcoin in a hot wallet, cold wallet, all the rest of us actually
hold them at the firm. So I've been paid in crypto, got the back
office and go to work, he was able to interoperate with my AR AP
treasury all the rest. So now I'm holding Bitcoin on the books.
Okay. Then if it drops by 20%, I think it was 24% over a four or
five day period. I have to book that impairment loss. Because
that's an obvious change in the asset itself, market conditions,
business conditions that then triggers this whole test for
impairment. And so if I am correctly trying to apply the current
accounting consensus, again not tailored for crypto assets, I
would go ahead and I would write down that asset. I would impair
the asset on the balance sheet, lowering that asset value, and
then also book the cost on the income statement as an expense in
the current period. Okay. Fine. But, and then if the price of
Bitcoin or other cryptocurrency recovers or goes up, what you
did, I can't do anything, I cannot under the current accounting
consensus for Bitcoin and other crypto as an indefinite lived
intangible asset, I cannot mark up or I cannot revalue that
asset. So an impairment loss is a permanent entry. And so even
though the market price might have recovered or even exceeded my
cost or the old basis that I had in this asset, I cannot
accurately reflect that on the balance sheet.

Adam: (08:29)
So what if an organization wanted to hold cryptocurrency as like
a long-term asset, does that kind of change their outlook on
it?

Sean: (08:36)
Well, I would say that really there have been some very
interesting headlines out there of firms like Tesla,
Microstrategy, Square, have been buying up Bitcoin, and I would
assume other cryptocurrencies to some extent, but they have all
come out publicly supporting Bitcoin and its use and as a store
of value, currency, economic em...