Why does crypto need its own accounting rules?

The financial statements

The US Securities and Exchange Commission (SEC) lists four main financial statements: the balance sheet, the income statement, the cash flow statement and the statement of shareholders' equity.¹ A balance sheet shows what a company owns and what it owes at one point in time. An income statement shows how much it made and spent over a period.¹

Assets are things a company owns that have value. Liabilities are amounts it owes to others.¹ Shareholders' equity is what would be left if the company sold all its assets and paid off all its liabilities. So assets always equal liabilities plus shareholders' equity.¹

Double entry in one paragraph

Most companies keep their books by double entry. The IRS, the US tax agency, explains it like this. Each transaction is first written in a journal, then posted to ledger accounts. Every account has a left side for debits and a right side for credits. Each transaction is recorded as a debit in one account and a credit in another, so total debits must always equal total credits.⁵ If they don't, there is a mistake to find.⁵

Which side goes up? ACCA, a professional accounting body, teaches a memory aid: AID, for "Asset Increase Debit". So when an asset goes up, you debit it.⁶ Flip one part at a time and you get the rest.⁶

The IRS's own example is paying $780 of rent: debit rent expense $780, credit cash $780.⁵ As ACCA puts it, every transaction affects the business in two ways.⁶

Where crypto fits

So which box does crypto go in? In June 2019, the IFRS Interpretations Committee answered that for companies using IFRS Accounting Standards.² The committee works with the International Accounting Standards Board (IASB), which develops those standards, and answers questions about how to apply them.⁸

• Not cash. The committee said it was not aware of any cryptocurrency used so widely that it is the basis on which all transactions are measured. So a holding of cryptocurrency is not cash.²
• Not a financial asset. It is not an equity instrument of another company, and it gives the holder no contractual right.²
• An intangible asset. It can be sold or transferred on its own, and it gives no right to a fixed or determinable number of units of currency. That fits IAS 38's definition: an identifiable non-monetary asset without physical substance.^2,9

Intangible assets are usually things like software, licences, trademarks and patents.⁹ US GAAP, the US rulebook, also treated most crypto as an intangible asset. Until recently it was held at cost and written down when its value fell, but never written back up until it was sold.³ Stakeholders told the US standard-setter that this did not give investors decision-useful information.³

Two rulebooks

US companies follow US GAAP, written by the Financial Accounting Standards Board (FASB). In December 2023, the FASB issued ASU 2023-08, a special rule for many crypto assets. Lesson 3 covers it.³ Deloitte notes that, unlike US GAAP, IFRS Accounting Standards have no specialised guidance for crypto. Companies apply the 2019 agenda decision and the general standards instead. Lesson 4 covers them.^4,2