As cryptocurrencies have become more mainstream, many nonprofit organizations have started to receive donations of cryptocurrencies and other crypto assets. While the majority of organizations choose to immediately liquidate any crypto assets they receive, some choose to hold on to them as part of their overall investment portfolio.
Under the current U.S. Generally Accepted Accounting Principles (GAAP), the accounting processes for organizations that hold crypto assets are relatively vague. As cryptocurrencies have continued to become more mainstream, the Financial Accounting Standards Board (FASB) has acted, recently issuing ASU 350-60 to improve the accounting processes for crypto assets.
This update, announced in December 2023, goes into effect for fiscal years beginning after December 15, 2024. In this overview, we share what’s changing and outline the steps organizations must take to ensure they remain in compliance with GAAP.
U.S. GAAP holds that crypto assets are intangible assets. Today, organizations that choose to hold crypto assets must record them on the balance sheet at the value of cost or fair value at the time of donation. Following this, the organization must periodically evaluate the crypto asset(s) for impairment. If the value of the underlying asset has declined, the organization would write the value of the asset down. If the value increased in future accounting periods, organizations could not re-adjust the value – they could only write it down further.
Given the volatility of many crypto assets, this approach could often lead to a significant discrepancy between the true value of an organization’s crypto asset holdings and the reported book value of these assets.
Under the revised accounting treatment, crypto assets are still considered intangible assets but are accounted for differently. The value of qualifying crypto assets should now be recorded at the asset’s market value and can be adjusted to account for fluctuations in value each accounting period. This allows organizations to more accurately report the value of their crypto assets.
The new accounting standards also specify that crypto assets should be recorded as a separate line item on an organization’s financial statements. Crypto assets should not be grouped with other intangible assets and must not be included in accounting for unrealized gains or losses related to more traditional investments. This step makes it easier for the users of financial statements to understand the way crypto assets are flowing through an organization’s accounting systems.
In addition to the revised accounting standards, the ASU also called for organizations that hold crypto assets to make additional disclosures around these assets. All crypto asset related activity should be broken out into a footnote.
Organizations that hold crypto assets must also disclose the following information in annual and interim financial reports:
In annual financial reports, organizations must include additional information, including a roll forward of activity in the reporting period which documents any gains, losses, new assets, or dispositions of crypto assets. For some organizations, these enhanced disclosures may prove challenging.
As crypto assets continue to become more mainstream, organizations should ensure that their gift acceptance and investment policies contain provisions for the treatment of donated crypto assets.
The majority of nonprofit organizations choose to liquidate crypto assets as soon as they are donated, but a small percentage do choose to hold these as part of their overall portfolio. Crypto assets remain volatile and if organizations choose to hold these assets, they must consider the potential impact on their balance sheets and income statements if the value of the asset were to drop precipitously.
By taking a proactive approach to defining their organization’s policies in this area, board members and executives ensure their organization is ready to accept crypto asset donations when approached by donors. In many ways, codifying these policies expands an organization’s potential donor base.
The ASU goes into effect for fiscal years beginning after December 15, 2024, but early adoption is permitted. Overall, it’s a much-needed change that allows organizations to more accurately account for the current value of their crypto holdings, although there may be some challenges in adopting these new accounting and disclosure standards.
If your organization holds crypto assets as part of its investment portfolio, the experienced advisors at Smith + Howard are available to answer any questions about the ASU or help your team implement these changes.
Contact a Smith + Howard advisor today to learn more about how our professionals can support your organization.
If you have any questions and would like to connect with a team member please call 404-874-6244 or contact an advisor below.CONTACT AN ADVISOR