Sale of digital assets – by Dr. Andrei Belonogov

Today I wanted to highlight one of the accounting requirements that results in a significant distortion of financial metrics.

When digital assets are the outputs of the ordinary activity of the company, proceeds from sales of digital assets 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 web3.0 (non-investment) companies have the 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.).

“If a counterparty to a contract engages with an entity to obtain the output of the reporting entity’s ordinary activities in exchange for consideration, that counterparty is considered a customer. Otherwise, the counterparty is considered a non-customer.”

[PwC Crypto Assets Guide]

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, these digital assets inevitably become the output of the ordinary operations. This is similar to side products for manufacturing companies that are also treated as an output of ordinary activities of the companies.

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 the digital assets were sold in exchange 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.