ISDA Considers Accounting Challenges for Digital Assets

In a paper exploring the accounting implications of investments in digital assets, ISDA described challenges in accounting and reporting for digital assets under U.S. GAAP.

ISDA classified digital assets into two groups:

1. native digital assets, such as cryptocurrencies, which "exist solely as a digital asset and do not represent any legal or proprietary interest in other assets"; and

2. asset-referencing digital assets, such as stablecoins, that "reference an underlying asset or right through a legal or operational mechanism."

ISDA asserted that the accounting implications should differ between the two, and the type of digital asset should be a factor in determining accounting obligations. (ISDA explained that under the current accounting rules digital assets are not specifically accounted for, but are often treated as intangible. Native digital assets would not meet the criteria to be classified as intangible assets, and other obligations for asset-referencing digital assets will vary widely depending on the nature of the underlying asset.)

ISDA expressed concern that these accounting implications may result in challenges for market participants looking to utilize digital assets as a means for active investment because current guidelines may not be able to accurately reflect the terms of those digital assets in financial statements. Additionally, ISDA suggested that a lack of specific guidance increases the potential for inconsistent practices across the market, such as varying cost identification methods for digital assets, which could impact the fair value of the asset and cause greater losses for investors. To help remedy this, ISDA recommended digital assets be accounted for at fair value, similar to other derivatives, as that would put investors in the best position to mitigate volatility in earnings from different cost identification methods.

ISDA also examined considerations on digital assets in addition to the existing obligations, such as (i) whether the asset produces cash flows, (ii) the factors that influence the price of the asset (e.g., the underlying asset), (iii) expected gain or loss upon sale of the asset, and (iv) the method for purchasing digital assets.

Under the current accounting model, ISDA stated that investors are unable to properly reflect the true nature and value of digital assets. ISDA noted that companies have considered applying a hedge approach to digital assets, reporting them as intangibles to hedge the total price risk. ISDA recommended an alternative approach to treat digital assets similar to how other equity securities are treated, which would require digital assets to be measured at fair value - unless it is not deemed to have a readily determinable fair value, in which case another model would need to be applied.