Accounting and auditing in the age of digital assets
Findings of a new working group
Diana Krupica, CPA | October 2020 Footnote
Editor's note: Updated September 30, 2020
The digital asset ecosystem is changing and expanding rapidly. So, how is the accounting profession responding to the changes being brought by digital assets?
Blockchain is an emerging technology that is still in its infancy, but its use and applications are growing exponentially. The accounting and auditing profession face many questions about how to manage the changes and challenges that blockchain poses. To address these questions, the AICPA in 2018 formed the Digital Assets Working Group, which is charged with developing nonauthoritative guidance for preparers and auditors.
This guidance will help practitioners successfully navigate the challenges associated with accounting for digital assets and auditing entities that have decided to enter the digital asset space.
What is the scope of the content under development?
The working group is divided into two subgroups, one focused on accounting and the other on auditing. When developing the guidance, the working group accounted for multiple viewpoints of various members of the digital assets ecosystem, including those engaged in development; maintenance; use of digital assets (such as those who buy, sell, trade, exchange or invest in them); custody or security of digital assets (such as hot or cold wallet providers, qualified custodians, or other custodial service providers); and validation of digital asset transactions on a blockchain.
The accounting subgroup focuses on accounting for digital assets and related transactions under GAAP for non-governmental entities. The scope of each Q&A is defined within the question (for example, digital assets versus crypto assets). The accounting Q&A does not address factors such as compliance with laws and regulations.
The auditing subgroup focuses on auditing digital assets under GAAS. Audits of public companies, audits performed in accordance with the PCAOB standards, and non-audit attest engagements are not currently contemplated. Although auditor independence and ethical requirements should be considered prior to performing acceptance or continuance procedures for all engagements, such considerations are not within the scope of the guidance.
Content published to date
Accounting subgroup
The working group’s early focus was on a foundational Q&A to address the accounting challenges of nonspecialized industries (for example, those entities that do not apply FASB ASC 946,
Financial Services — Investment Companies). The Q&A covers classification and measurement of crypto assets; for digital assets classified as indefinite-lived intangible assets recognition and initial measurement, classification, measurement of cost basis, derecognition of digital asset holdings); and recognition of digital assets when an entity uses a third-party hosted wallet service.
As an example, here’s a look at question No. 4 of the practice aid: How should an entity account for digital assets that are classified as indefinite-lived tangible assets subsequent to their acquisition?
Response: An indefinite-lived intangible asset is initially carried at the value determined in accordance with FASB ASC 350-30-30-1 and is not subject to amortization. Rather, it should be tested for impairment annually or more frequently if events or changes in circumstances indicate it is more likely than not that the asset is impaired. Paragraphs 18B and 18C in FASB ASC 350-30-35 provide examples of relevant facts and circumstances that should be assessed to determine if it is more likely than not that an indefinite-lived intangible asset is impaired. If an impairment indicator exists and it is determined that the carrying amount of an intangible asset exceeds its fair value, an entity should recognize an impairment loss in an amount equal to that excess. After the impairment loss is recognized, the adjusted carrying amount becomes the new accounting basis of the intangible asset. Refer to paragraphs 15–20 in FASB ASC 350-30-35 for details on the subsequent accounting for intangible assets that are not subject to amortization.
Auditing subgroup
In July 2020, the first auditing topic,
Client Acceptance and Continuance, was incorporated into the practice aid. As firms seek to provide audits to entities within the digital assets ecosystem, they must exercise caution and give due consideration to the unique risks and challenges such audits give rise to.
The digital asset ecosystem is an evolving business environment that presents practitioners with unique risks and complex audit challenges ranging from obtaining sufficient appropriate audit evidence to understanding the complex IT environment of entities within the ecosystem. The working group guidance is not intended to be an exhaustive list of challenges or recommended procedures. It focuses on the most widely adopted current use cases and does not address certain emerging enterprise use cases for blockchain technology (such as supply chain use cases).
Client Acceptance and Continuance covers the following subtopics:
- Auditor skill sets and competencies.
- Management skill sets and competencies.
- Management integrity and overall business strategy.
- Processes and controls, including IT.
Each subtopic begins with a detailed summary of applicable professional standards, outlines some unique challenges to engagements in the digital assets ecosystem, and ends with practical, recommended approaches that auditors may apply to address those challenges and meet those requirements.
An example from the practice aid concerning digital assets held by the entity: If the entity stores digital assets itself (also referred to as self-custody), it may be important for the auditor to consider the entity’s related technical capabilities, including the entity’s ability to verify existence of the digital asset as well as safeguards in place to prevent digital asset loss due to fraud or error. In most public blockchains, the underlying digital assets are bearer instruments and private keys that are lost or stolen represent irreversible, and typically uninsured, losses for the entity, with no recourse due to the decentralized nature of the blockchain.
Looking ahead
It is important to note that the working group bases the practice aid’s guidance on its members’ experience and existing professional literature. The working group’s outreach to industry experts is ongoing and seeks to identify and develop additional topics as needed. As each subgroup completes guidance for a new topic, it is put through a rigorous review process before added to the practice aid. Key takeaways:
Accounting subgroup
The rights and obligations associated with digital assets — not to mention the terminology — vary significantly. Therefore, it is critical to consider that the accounting treatment for a digital asset and related transactions ultimately will be driven by the specific terms, form and underlying rights and obligations of a digital asset.
Auditing subgroup
The client acceptance and continuance considerations remain critical to an auditor’s conformity to professional standards. Engagements in the digital assets ecosystem might introduce new or different compliance risks that warrant additional consideration by the auditor.
The digital assets practice aid is located at www.aicpa.org/digitalassets. Stay tuned for additional topics to be released throughout 2020 and beyond.
Diana Krupica, CPA is the AICPA lead manager, Emerging Assurance Technologies Assurance and Advisory Innovation.
