Continuing my notes about digital assets accounting here and here. With the adoption of cryptocurrency as legal tender (see the announcement by Polygon), I wanted to discuss the common misconception that, I believe, was introduced in accounting profession by AICPA's Digital Assets Guide. The guide states that cryptocurrency cannot be treated as cash because the FASB definition of cash as items that are legal tender and backed by sovereign government:
The AICPA Digital Assets Guide indicates that crypto assets generally do not qualify as cash or cash equivalents when they are not legal tender or backed by a sovereign government. The Guide also notes that crypto assets typically lack a maturity date and historically have experienced significant price volatility. [AICPA Practice Guide "Accounting for and auditing of digital assets"]
However, if you open the actual definition given in the FASB ASC Master Glossary, you will see the term "cash" definition. The FASB Master Glossary defines cash to include currency on hand, demand deposits, and other accounts having characteristics similar to demand deposits, including the ability to add or withdraw funds without prior notice or penalty. [FASB ASC Master Glossary]
As you can see, there is no reference to legal tender or sovereign government back up. It appears that the definition everyone is writing about actually is the definition of currency given in the following IRS guidance on cryptocurrencies:
The Internal Revenue Service (IRS) is aware that “virtual currency” may be used to pay for goods or services or held for investment. Virtual currency is a digital representation of value that functions as a medium of exchange, a unit of account, and/or a store of value. In some environments, it operates like “real” currency - i.e., the coin and paper money of the United States or of any other country that is designated as legal tender, circulates, and is customarily used and accepted as a medium of exchange in the country of issuance - but it does not have legal tender status in any jurisdiction.
[IRS Notice 2014-21]
This guidance issued by IRS discuss only tax treatment of cryptocurrency transaction and is not a part of US GAAP requirements in any way. I wanted to clarify that I do NOT suggest that cryptocurrency should be accounted for as any other currency, but there is definitely a missing piece in the current guidance on digital asset accounting that will hopefully be addressed as part of the work on digital assets that was recently included in the FASB agenda as item titled "Accounting for Exchange-Traded Digital Assets and Commodities".