Crypto payments and expenditures: Navigating the accounting maze

As cryptocurrencies continue to gain mainstream adoption, businesses have started accepting digital assets for their goods and services. At the same time, companies are also using crypto for various expenditures. However, accounting for crypto payments and expenditures presents unique challenges due to their volatile nature and the lack of clear regulatory guidance. In this article, we will explore the essential aspects of accounting for crypto payments and expenditures.

Accounting for crypto payments: revenue recognition and valuation

When a company receives digital assets as payment from a customer, revenue recognition rules come into play. Here are some key considerations:

• Non-cash Consideration: When a company accepts non-cash consideration (e.g., cryptocurrency) from a customer, the value is determined at the contract's inception. The recorded revenue is based on the value of the crypto at that time, and subsequent changes in its value do not affect the recognized revenue.
• Valuation Challenges: Companies must decide on the value of the cryptocurrency that drives revenue recognition. They must also account for the price volatility of the crypto asset and consider its presentation in the financial statements, including any required disclosures.

For example, when an online subscription service provider accepts Ethereum as payment for their services, they must navigate the complexities of crypto accounting, e.g.

Step 1: Determine the value of Ethereum at contract inception

At the time the online subscription service provider and the customer enter into a contract, both parties should agree on the value of Ethereum to be used as payment for the subscription services provided. This value should be based on a reliable source, such as a reputable cryptocurrency exchange rate, and should be documented in the contract or payment terms.

Step 2: Recognize revenue based on the agreed value

Once the value of Ethereum is established, the online subscription service provider should recognize revenue based on the agreed value. The revenue should be recorded in the provider's accounting system using the functional currency (e.g., USD) equivalent of the Ethereum value at the time of the contract.

Step 3: Monitor Ethereum price volatility

As Ethereum's value may fluctuate over time, the online subscription service provider should closely monitor the changes in Ethereum's value between the time of contract inception and when the payment is received. This monitoring can be done using crypto tracking tools or software that provide real-time updates on cryptocurrency values.

Step 4: Account for the gains or losses due to price volatility

When the online subscription service provider receives the Ethereum payment, they should compare the value of Ethereum at the time of receipt with the value at the time of contract inception. If there is a difference in value, the provider must record the corresponding gain or loss in their accounting system.

For example, if the value of Ethereum has increased since the contract inception, the online subscription service provider will record a gain. Conversely, if the value of Ethereum has decreased, the provider will record a loss.

Step 5: Convert Ethereum to functional currency

Upon receiving the Ethereum payment, the online subscription service provider may choose to convert the cryptocurrency to their functional currency (e.g., USD) or retain it as a digital asset. If the provider opts to convert the Ethereum, they should use the exchange rate at the time of conversion and record the transaction accordingly.

Step 6: Financial statement presentation and disclosures

The online subscription service provider should ensure that all Ethereum-related transactions are accurately presented in their financial statements. This presentation may include disclosing the revenue recognized, gains or losses from price volatility, and any remaining digital asset holdings.

Accounting for crypto expenditures:

When crypto is used for expenses, the transaction has two components: (1) the sale of the crypto asset and (2) the receipt of a service. Here are some essential aspects to consider:

• Customer vs. non-customer: The company must assess whether the other party is a ''customer'' or a ''non-customer'' according to accounting rules. This determination affects the financial statement line item presentation.
• Valuation at contract inception: The valuation of the crypto asset and the pricing of the transaction are established when the contract is entered into or becomes legally enforceable. The company must decide whether the transaction price should be based on the value of the service received or the value of the crypto asset sold.
• Price variability exposure: If the company is exposed to price variability in the crypto asset after setting the transaction value, this exposure may require separate accounting, often in the form of derivatives.
• Realization of value differential: If the crypto asset used in the transaction is recorded at a different value than the transaction value, the company may need to realize the value differential.

As businesses increasingly embrace cryptocurrencies for payments and expenditures, it is crucial to navigate the complexities of crypto accounting. Companies must:

• Stay updated: Keep up with regulatory developments and evolving accounting standards related to cryptocurrencies. This information will help businesses maintain compliance and minimize potential risks.
• Consult experts: Engage with accounting professionals who have expertise in cryptocurrency accounting. They can provide valuable guidance on best practices and assist in implementing appropriate accounting processes.
• Invest in technology: Implement accounting software and tools designed to handle the unique challenges of cryptocurrency transactions. These solutions can help streamline the tracking, valuation, and reporting of crypto payments and expenditures.
• Be transparent: Clearly disclose crypto-related accounting policies and practices in financial statements to provide investors and stakeholders with a better understanding of the company's exposure to cryptocurrencies.