How do you close the books on crypto at the end of a month?

Why crypto makes the close harder

Auditors test a company's numbers against a list of assertions set out in the auditing standard ISA 315. Three of them are central to a crypto close: the assets exist, the company holds the rights to them, and each transaction is recorded in the right period.⁷

Crypto adds its own problems. EY says companies must keep proper books and records even when a blockchain is involved. If an exchange or custodian holds the crypto, the company should not rely only on that firm's statements.¹ And PwC notes that crypto markets often have no daily close.³

Step 1: confirm what you own

Start with existence and rights.⁷ If the company holds its own keys, this is simple. If an exchange or custodian holds them, EY says the company must work out whether it owns the crypto, or only has a right to get it back from that firm.²

EY's questions include who legally owns the assets, whether the firm mixes customers' crypto with its own, and who has a claim if the firm goes bankrupt.² EY says a right to get crypto back may be accounted for differently from owning it.²

Step 2: reconcile, with a clean cut-off

EY says companies should do frequent and detailed reconciliations between the blockchain and their books, including adequate cut-off procedures.¹ Cut-off means each transaction is recorded in the correct accounting period.⁷

In practice, that means comparing the books with each wallet's balance on the blockchain. Where an exchange or custodian holds the crypto, EY says its statements alone are not enough for the company's books.¹ EY also warns that related-party transactions are hard to spot, because blockchain parties are known only by their addresses.¹

Step 3: price each holding

US GAAP and IFRS define fair value in the same words: the price that would be received to sell the asset in an orderly transaction between market participants at the measurement date.^4,8 IFRS 13 calls this an exit price, and says the company's own plan to keep the asset doesn't matter.⁸

Fair value comes from a holding's principal market. EY describes it as the market with the greatest volume and level of activity that the company can access.² Without evidence to the contrary, the market where a company normally sells is presumed to be that market.²

• One market, not an average. PwC says the principal market is a single market, not an average across markets.³
• Not a price website. Deloitte says a market aggregator tool is not itself a market, so it can't be the principal market.⁹
• Price times quantity. In an active market, EY says fair value is the quoted price multiplied by the quantity held.²
• A set time. Crypto markets often never close. PwC says the price should generally be the last trade before midnight in the company's own time zone, and that companies should set and consistently apply a policy for events that may affect fair value.³
• Restrictions. EY says a restriction on selling, for example on staked tokens, may affect fair value. It depends on whether the restriction belongs to the asset or to the holder.²

Step 4: record the numbers

• US GAAP, in-scope crypto. Remeasure each holding to fair value and put the gain or loss in net income.⁴
• IFRS, cost model. Test for impairment where needed, and at least once a year for an intangible asset with an indefinite life.^5,10
• Interim disclosures. Under US GAAP, interim reports, such as quarterly ones, also need the name, cost basis, fair value and units of each significant holding.⁴

Step 5: write down the judgements

EY says a company's controls should cover its policies on the value of its crypto, the cost basis, gains and losses, and impairment. They should also cover the nature of the asset when a third party holds it.¹ Under IFRS, the 2019 agenda decision points to disclosing the judgements with the most significant effect on the amounts.⁶

For fair value, EY says controls should cover how the principal market is identified, whether it is still active, and any adjustments to quoted prices.¹ The 2019 agenda decision also noted that big price moves after the reporting date may need disclosing.¹¹