Today I want to highlight an accounting requirement that significantly distorts financial metrics.
When digital assets are the ordinary output of the company's activities, proceeds from their sale are recorded as revenue. This is because the sale of an ordinary output of the company’s business activity automatically results in the purchaser meeting the definition of a customer under FASB ASC 606. The absolute majority of Web 3.0 (non-investment) companies have a primary business that results in the accumulation of digital assets (digital asset rewards to miners/validators, digital assets received as revenue for GameFi companies accepting crypto as the primary payment method, etc.).
Per PwC's Crypto Assets Guide, the customer is a counterparty that exchanges consideration for outputs of the entity’s ordinary activities.
Importantly, Web 3.0 companies do not need to be in the business of selling digital assets to fall under these requirements. As long as digital assets result from their ordinary operations, they are considered outputs of those operations. This is similar to by-products for manufacturing companies, which are also treated as outputs of ordinary activities.
As a result, if companies follow the accounting requirements, the revenue they earn is recorded twice:
First, when the original service has been sold in exchange for digital assets;
Second, when they sell the digital assets for cash.
This revenue inflation effect is something that analysts need to be aware of when researching the financial statements of crypto businesses and comparing the results between companies and industries.