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Accounting Issues Related to Bitcoins

Cecily Raiborn and Marcos Sivitanides

B
itcoins: they’re 2014). If BTC
mentioned in Despite the frequent mention of Bitcoin in recent exchange transac-
business news- years in the press and business publications, tions are occurring
papers, current peri- many people are still uncertain what this crypto- between buyers and
odicals, television currency is or how it works. And although bitcoins companies as well
shows, and movies. But (BTCs) are now an accepted medium of exchange as between compa-
often, when a discus- for some businesses and not-for-profit organiza- nies, the mechanics
sion about bitcoins is tions, no specific accounting guidance has been of accounting for
attempted, the most issued for these transactions. This article provides this virtual currency
common response is, must be identified.
some basic information about BTCs and addresses
“I’ve heard of them This article
but am not really sure six specific financial accounting issues: asset addresses how BTCs
what they are or how classification, mining activity, investment holdings, work and discusses
they work.” And there exchanges, merger and acquisition (M&A) transac- six specific financial
has been little acknowl- tions, and disclosure. © 2015 Wiley Periodicals, Inc. accounting issues
edgment of bitcoins (asset classification,
(BTCs) in accounting mining activity,
literature; typing in “Bitcoin” of New York) currently allow investment holdings, exchanges,
into the Financial Accounting BTCs to be exchanged for goods merger and acquisition [M&A]
Standards Board (FASB) search or services. When Overstock. transactions, and disclosure)
engine in early 2014 provided com started accepting BTCs in related to accounting for BTCs.
this message: “Sorry no results January 2014, it “immediately
found on the search terms you grossed $100,000 in Bitcoin BITCOIN BASICS
entered.” orders” (Associated Press [AP],
But the use of cryptocurren- 2014) Two Las Vegas casinos For thousands of years,
cies, of which Bitcoin is the most began accepting BTCs for non- “money” was based on real
familiar, is increasing. From gaming transactions in January things: grains, tobacco, precious
June to December 2013, Bitcoin 2014 (Stutz, 2014). Some online metals, and so on. With the pas-
transactions increased from companies even organized spe- sage of time, governments began
1,700 per hour to over 3,000, cial “sales” for 2013’s Black Fri- the process of “fractional” bank-
and BTCs are accepted for pay- day if buyers would pay in BTCs ing that allowed more currency
ment by over 10,000 businesses (Miners, 2013). And in 2013, notes to be issued than could be
(National Taxpayer Advocate BTCs were used for two merger redeemed by the underlying hard
[NTA], 2013, p. 249). Some com- transactions: Blockchain bought currency. However, neither U.S.
panies (such as Virgin Group, Zeroblock for an undisclosed dollars nor other major world
the Sacramento Kings, and Tig- sum of BTCs, and an unnamed currencies are now redeem-
erDirect.com) and not-for-prof- buyer bought SatoshiDice for able in gold; thereby, “[m]oney
its (such as Junior Achievement $11.5 million in BTCs (Kharpal, has been cast adrift from the

© 2015 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).
DOI 10.1002/jcaf.22016 25
26
discipline of being defined in
terms of any specified goods or
services” (Turnbull, 2009, p. 9).
A bitcoin is a digital
medium of exchange that is
created, acquired, held, and
traded electronically. Unlike
a traditional fiat currency, no
government (or other authorized
agency, such as a bank) mints,
controls, or prints BTCs. BTCs
were the first and are probably
the most well-recognized exam-
ple of cryptocurrency, labeled
as such because cryptography is
used to make the ownership and
trade of these digital currencies
as secure from loss or theft as
possible. Programmer Satoshi
Nakamoto (a pseudonym)
invented BTC as the outcome
of a complex “proof-of-work”
scheme that requires the solv-
ing of complex mathematical
problems (a process referred to
as “mining”). Bitcoin problems
are solved in phases, with solu-
tions releasing blocks of about
25 uniquely numbered BTCs
(similar to a vehicle’s VIN) to
the problem solvers (“miners”)
but at a rate of no more than
25 BTCs every 10 minutes
(Smits, 2014). Each consecutive
problem phase becomes more
difficult, requiring more time,
central processing unit (CPU)
cycles, and computer power cost.
The finite supply of BTCs is
21 million coins, resulting from
the “initial rules governing how
many bitcoins miners could
earn, and how often” (Surow-
iecki, 2011, p. 107). Reach-
ing that level of bitcoins will
take several decades and, once
reached, increasing the number
of bitcoins in circulation will
be “a mathematical impossibil-
ity” and, thus, have “no pos-
sibility of monetary inflation”
(Lemieux, 2013, p. 14).
Before acquiring or trans-
acting with BTCs, however,
DOI 10.1002/jcaf
The Journal of Corporate Accounting & Finance / January/February 2015
one must have a safe place to
store them—and that place is a
“wallet” that provides a record
of personal BTC (or fractional
BTC) availability. A “hot”
wallet is an electronic, heavily
encrypted digital one directly
connected to the Internet, while
a “cold” wallet is a noncon-
nected item (such as a flash drive
or even a piece of paper) that
contains information. The wallet
records all incoming and outgo-
ing transactions and may also
be used to authenticate owner
credentials (such as age).
Wallets can be created using
Internet software utilities, and
the information can be placed
on any computer device used
to make electronic transactions
and linked to a traditional bank
account. Wallets can send and
receive BTCs to any other digital
wallet without the need for the
transaction to be recorded or
processed by a third party (such
as a bank). Thus, transactions
are anonymous to anyone other
than the transacting parties.
Each wallet is accessible
only through the use of cryp-
tographic algorithms and sets
of passwords called public and
private keys. The public key is
the computer address that other
parties will need to engage in
transactions with an individual;
the private key allows the owner
to open his/her digital wallet and
send cryptocurrency to another
computer address (public key).
Both types of keys are essen-
tially passwords; however, secu-
rity is essential for private keys.
In Bitcoin, a private key is a 256-
bit number that can be repre-
sented in a hexadecimal format,
in Base 58 wallet import format,
or in mini private key format
(see Exhibit 1). Public-private
key encryption is the most
secure form of data encoding
currently available and, because
it is “virtually impossible to
duplicate or ’impersonate’ a
private key—even if you were
to employ the most powerful
supercomputer in the world,” it
is nearly impossible for some-
one to rob an electronic wallet
(Robinson, 2013, p. 9). Crypto-
currency transactions from the
digital wallets are done “peer-
to-peer,” which means that,
when purchasing from a vendor
accepting BTC, the BTC price
of the item is directly transferred
between the buyer’s and ven-
dor’s computer wallets without
involvement of any other party
such as a commercial bank.
For several years, physical
BTCs were produced. The most
well-known ones (Casascius
coins) were made in several dif-
ferent denominations by Mike
Caldwell of Sandy, Utah. He
charged a nominal fee to cus-
tomers to mint tangible BTCs
that were protected by several
security levels, “including a
touch-sensitive hologram,” and
could be used in the same man-
ner as the virtual items (Anony-
mous, 2013).
Over the years, Caldwell
minted about 90,000 BTCs
(McMillan, 2013). However, in
November 2013, Caldwell was
notified by the Financial Crimes
Enforcement Network (FinCEN)
to discontinue his BTC produc-
tion because the U.S. Treasury
Department classified him as
a “money transmitter,” which
subjected him to Bank Secu-
rity Act regulations (Goodwin
Procter, 2014). Caldwell, though,
accepted payment for his physi-
cal BTCs only in virtual BTCs,
so there was actually no “money”
involved in the process, and there
was no bank account that could
be seized “should he incur Fin-
CEN’s wrath” (Plafke, 2013).
Utilization of BTCs has
reached the stage at which
© 2015 Wiley Periodicals, Inc.
The Journal of Corporate Accounting & Finance / January/February 2015 27

Exhibit 1

Examples of Private Keys

In hexadecimal format: 32 bytes or 64 characters in the range 0–9 or A–F.
C4 87 3D 58 C6 F9 7D C2 FB 6A 63 78 63 33 59 F4 45 41 13 30 3D B6 1D 20 AC 67 FB 23 3A A3 32 62
In Base 58 wallet import format: Private keys associated with uncompressed public keys are 51 characters and
always start with the number 5; private keys associated with compressed public keys are 52 characters and
always start with a capital L or K.
5Lb8kKf9zgWQnocidDB76MzRL6TsZPY36hWXMssSzTydYXYB9KF
In mini private key format: Used where space is critical and in physical bitcoins.
SxavRBLoMU6mDrstUVmfgv
Source: Adapted from Bitcoin Researcher in Research, Technology, “Wallet Private Key,” Bitcoinvista.com (February 24, 2014); http://bitcoinvista.com/2014/02/24
/wallet-private-key/

there are now some few-and-far-
between ATM machines that
transact in BTCs. In the United
States, ATMs that deliver BTCs
(in the form of paper tickets) for
cash were available in early 2014,
but the first machine from which
cash could be received for BTCs
took up residence at a bar in
Austin, Texas, in February 2014
(Jervis, 2014). Additionally, vari-
ous BTC apps are available for
Android and iPhones.
Given the changes that have
taken place in the bitcoin land-
scape, companies are becoming
more willing to accept BTCs for
transactions. But because of the
unusual nature of the exchange
process, several accounting
issues need to be resolved.
ACCOUNTING ISSUES
According to one source,
some FASB members indicated
that no generally accepted
accounting principles (GAAP)
exist for BTCs, which indicates
that BTC accounting “would
fall under [an]other compre-
hensive basis of accounting” 2013, p. 346). Given that most
(Lugo, 2013). However, regard- companies still do not currently
less of the accounting basis, accept BTCs for exchange pro-
there are some BTC accounting cesses, the cash classification is
issues that need clarification. Of unrealistic.
course, for BTC accounting to The Central Bank of Fin-
be representationally faithful to land has declared that BTCs
the events that generate the cryp- are “not currency or even an
tocurrency and its exchange and electronic payment”; the latter
mining processes, those issues classification requires that such
are critical to proper accounting. a payment form “must have an
issuer responsible for its opera-
Asset Classification tion,” which bitcoin does not
(Pohjanpalo, 2014). China’s cen-
A BTC fits the definition of tral bank banned lenders from
an asset because it represents a handling the virtual currency,
probable economic benefit for stating that it is not a currency
a particular entity and that has with “real meaning” and has
resulted from a past transac- no “legal status” (Yang, 2013).
tion (FASB, 1985, ¶25). But is a Governments in Norway, Korea,
BTC cash, a cash equivalent, an and Germany have also taken
intangible, or an investment? stances that BTCs are not cur-
To be considered cash, rency, with the director general
an item must be money (i.e., of taxation in Norway saying
legal tender) and available for BTCs do not “fall under the
use in an exchange process. usual definition of money or
Cash is considered “the stan- currency” (Russell, 2013; Wer-
dard medium of exchange and digier, 2013).
the basis for measuring and FinCEN has stated that a
accounting for all other assets” virtual currency is an exchange
(Kieso, Weygandt, & Warfield, mechanism that exists in

© 2015 Wiley Periodicals, Inc. DOI 10.1002/jcaf

28
electronic form and acts like
currency in some environments
(such as electronic transactions).
However, a virtual currency
“does not have all the attributes
of real currency” and “does not
constitute legal tender” in any
jurisdiction (Fisher & Kaplinsky,
2013; Goodwin Procter, 2014).
The U.S. Department of Jus-
tice believes that BTCs can be a
“legal means of exchange,” exist-
ing as “software that’s designed
to be untraceable”; additionally,
former Federal Reserve Chair-
man Ben Bernanke stated in a
letter to a U.S. Senate commit-
tee hearing that the Fed “has no
plans to regulate the currency”
(Raskin, 2013).
In January 2014, a FinCen
Administrative Ruling indicated
that some participants in the
BTC economy will be regu-
lated as ‘money transmitters’
or ‘money services businesses’
(MSBs) under the Bank Secrecy
Act, while other participants
would not be treated as such.
Bitcoin miners will not be
treated as MSBs if those miners
use BTCs and/or convert BTCs
into other real or virtual curren-
cies solely for personal purposes,
or if those miners purchase and
sell cryptocurrency for their
investment accounts; nor does
the production or distribution
of software production that
facilitates the sale of virtual
currencies constitute an MSB
(Greebel et al., 2014). While a
“money services” designation
provides some level of credence
to a link between virtual curren-
cies and cash, that linkage does
not appear to be sufficient to
assign a cash classification to a
BTC asset.
A bitcoin would also not
meet a cash equivalent defini-
tion: it is neither a highly liquid
asset nor can it be readily con-
vertible into a known amount
DOI 10.1002/jcaf
The Journal of Corporate Accounting & Finance / January/February 2015
of cash. Even though BTCs
may be exchanged for actual
money denominated in various
government-issued and -backed
currencies, one could hardly say
that BTCs are “highly liquid.”
BTCs cannot be deposited into
a typical bank or savings institu-
tion in the United States or most
countries abroad. BTCs also
cannot be “cashed” or obtained
at most ATMs. Such limited
access would seem to preclude a
concept of “highly liquid.”
As to BTCs’ being eas-
ily exchanged into a known
cash amount, the market value
fluctuations of BTCs relative
to any “real” currency would
cast doubt on that concept. On
July 18, 2012, one BTC was
worth about $9.20, which was
approximately a 40% increase
over the prior month (Lee, 2012).
According to bitcoincharts.com,
the weighted price of a BTC
on July 23, 2013, was $94.64,
which increased to $1,209.94 on
November 30, 2013, was down
to $894.83 on January 17, 2014,
and a mere $426.96, on August
15, 2014. Thus, there can be
significant risk in regards to
changes in value on a day-to-day
basis, making any prediction
of a “known amount of cash”
extremely difficult. Consider that
after a seizure of Silk Road (an
anonymous online entity whose
business was drug purchases
and computer hacking services)
by the U.S. Marshals Service
in 2013, the value of the BTCs
seized went from $3.6 million to
$27 million in six months (Flitter,
2014). U.S. banking institutions
have expressed their leeriness of
cryptocurrencies by aggregating
virtual currency companies with
marijuana merchants, payday
lenders, and online gamblers as
customers that are being “fired”
in the name of risk management
(Sidel & Johnson, 2014).
Although BTCs are virtual
and, except for some limited
number of coins that were man-
ufactured, have no true physical
existence, the intangible asset
classification is inappropriate for
any cyptocurrency. Intangibles
specifically exclude financial
instruments from inclusion. And
while BTCs cannot be viewed as
cash, they cannot be ignored as
a financial exchange medium.
Given all that they cannot
be, the only reasonable asset
classification for BTCs is either
a short- or long-term invest-
ment. Holding BTCs as invest-
ments would require them to
be booked at their value when
received. An officer of the Bank
of Finland stated that BTCs
were “comparable to a com-
modity” (Pohjanpalo, 2014).
But a commodity is typically
viewed as “a basic good used in
commerce [including a financial
product] that is interchangeable
with other commodities of the
same type” for which the sale
and purchase “is usually carried
out through futures contracts on
exchanges that standardize the
quantity and minimum quality
of the commodity being traded”
(Investopedia, n.d.). This defini-
tion makes it difficult to see a
BTC as a commodity since each
BTC or other virtual currency
is not “interchangeable” or fun-
gible because of the variations
in cost and acceptance as an
exchange medium.
In late March 2014, the
U.S. Internal Revenue Service
declared that BTCs and other
virtual currencies will be treated
as stock with the implicit con-
sequences of transactional
capital gains. Although this
proclamation reinforces the
determination that BTCs are not
cash, it concomitantly imposes
substantial rules for record keep-
ing on companies engaging in
© 2015 Wiley Periodicals, Inc.
The Journal of Corporate Accounting & Finance / January/February 2015
BTC transactions, and regula-
tors have indicated that BTC
exchange processes must comply
with existing money laundering,
fraud, and other rules (McKin-
non & Tracy, 2014).
Mining Transaction
The next question relates to
the credit portion of the BTC
acquisition journal entry. For
most circumstances, this side of
the transaction is simple. Pur-
chases of BTCs would be deb-
ited to an investment account
and credited to whatever was
given in the exchange transac-
tion: cash (for the amount was
given to the selling party); sales
revenue (if related to a revenue
transaction); an appropriate
stock account (at par or stated
value with an increase/decrease
to the appropriate paid-in capi-
tal account, or the entire amount
would be credited to the appro-
priate stock account if the stock
were no par, no stated value);
or Bitcoin account payable.
If BTCs were acquired by the
exchange of an asset other than
cash, the other asset would be
removed from the books (includ-
ing any related contra-accounts),
and there would likely be a gain
or loss on the exchange.
Small details as to amounts
to recognize might arise, for
example, in a sales transaction.
In 2013, several companies
dropped prices for Black Fri-
day customers paying in BTCs.
Should the sales account reflect
the actual sale price to non-BTC
payers with a sales discount
account being recorded for
the price differential between
non-BTC and BTC payers? Or
should the sales revenue reflect
the actual amount paid by BTC
payers as if they were simply
an alternative customer group
that receives a special price or
© 2015 Wiley Periodicals, Inc.
a trade discount that is unac-
counted for in the transaction?
The amount at that time was
likely immaterial, but larger
differentials might arise in the
future if companies are truly try-
ing to generate BTC sales. Such
contra-account details are rarely
shown on the face of the income
statement but, given the wide
fluctuations in BTC value, inves-
tors and creditors might believe
the proportion of BTC sales
to “other” types of sales to be
decision-influencing information
that should be provided through
some form of disclosure.
The real concern is when
BTCs are acquired through
“mining” activities. In the nor-
mal scheme of events, a com-
pany does not generate financial
products solely from engaging
in internal activities. But that is
what the process of “mining”
does: it creates additional BTCs
for an entity that previously did
not have those particular bit-
coins. In a sole proprietorship or
partnership, the solving of com-
plex algorithms could be consid-
ered an ownership investment of
time and effort that might result
in a credit to one or more owner
capital accounts. A similar credit
could not occur in a corporate
entity; however, stock shares
could be issued to someone who
made the personal sacrifice and,
thus, result in a credit to com-
mon or preferred stock (with, if
necessary, appropriate adjust-
ments to paid-in capital in excess
of par, or stated, value). Or cash
could be paid to the solving
individual(s) and a credit to cash
would be fitting.
A difficulty exists about the
credit in a mining transaction
if the person engaged in the
mining process and solving the
BTC algorithms were simply an
employee. Employees doing their
jobs cannot generate revenue
29
for an entity nor can they cre-
ate ownership investment. Thus,
there are two possible scenarios.
The first would be to consider
BTCs as something that is being
internally developed so that it
can be sold—in other words,
something similar to inventory
or software. Costs of creat-
ing inventory are capitalized
until the goods are complete
and ready for sale. Addition-
ally, because BTCs already have
“technological feasibility” in
that they can be sold or used
for transactional payment,
proper accounting for software
development would also require
that BTC production costs
be capitalized. Thus, costs of
labor and overhead for mining
for BTCs should be capitalized
and allocated to the quantity of
BTCs mined and matched with
revenue generated from the sale
of the BTCs or, if used in a pay-
ment or purchase process, writ-
ten off with a resultant realized
gain or loss on the payment/pur-
chase transaction. Mining costs
for BTCs can be expensive when
the costs of “furiously churning”
computers and related electric-
ity are considered (Krugman,
2013). One cost computation by
a peer-to-peer currency orga-
nization suggests that approxi-
mately $17 million per day is
spent on mining BTCs that are
worth less than their cost, with
an estimated operating margin
of –329.04% (Fernholz, 2013).
A second possible account-
ing methodology would expense
the costs of bitcoin mining as
they were incurred; however,
when a bitcoin was generated, its
fair value would be recorded as
both an asset and an unrealized
gain in comprehensive income.
Simple acquisition of a BTC
could be viewed as a noncom-
pletion of the earnings process:
it is not until the BTC is used
DOI 10.1002/jcaf
30
outside the organization that
value becomes realized. Upon
sale or use for a business pur-
pose (a payment/purchase trans-
action), the asset and unrealized
gain would be decreased, and a
realized gain (or loss) would be
recorded through the income
statement. That full amount
of the BTC’s value would pro-
vide an increase to ownership
equity through retained earnings
(which would be similar to the
increase in a sole proprietorship
or partnership capital account).
Holding Process
As with other investments,
BTCs will increase or decrease
in value while held. At this time,
BTC investments are substan-
tially more speculative than
many other investments, and the
available hedging opportunities
are few and basically unknown.
For example, Coinhedge claims
that it has “built a financial
derivatives market based on”
decentralization, anonymity, and
responsiveness for BTC users,
but accessing the Coinhedge site
provides no readable informa-
tion about the company.
In 2011, the Malta Financial
Services Authority began the
Exante Hedge Fund (not avail-
able at that time to U.S. persons
and institutions); Exante then
incorporated Bitcoin Fund as
a segregated account company
(subfund) to invest “in core-
level infrastructure of the new
generation economy” (Matonis,
2013a). Bitcoin Fund began an
Automatic Trading Platform
(ATP) in mid-2013 to “allow
share trading by investors, thus
providing the capability to take
long or short bitcoin positions
depending on investment out-
look” (Matonis, 2013b).
According to Hedgeweek,
the Bitcoin Fund was the best
DOI 10.1002/jcaf
The Journal of Corporate Accounting & Finance / January/February 2015
performing hedge fund between
January and November 2013,
with a return of 4,847 percent
(Hedgeweek, 2013). The Bit-
coin Fund strategy is simple: A
fund unit is equal to the price
of one BTC and the fund buys
bitcoins when money is invested
in the fund and sells BTCs when
money is withdrawn (Yanofsky,
2013). However, most compa-
nies would likely not participate
in Bitcoin Fund because its fees
are high for performing an activ-
ity—buying or selling bitcoins—
that anyone can do “with a com-
puter and a modicum of work”
(Yanofsky, 2013). Additionally,
in December 2013, Predictious
(a Dublin-based prediction mar-
ket) launched Bitcoin Option
Spreads that allowed “both
long- and short-positions to be
constructed” on BTCs (Dur-
den, 2013); Exhibit 2 provides
a glimpse of BTC bid and ask
prices at one point in time.
Citigroup’s Dr. Steven Eng-
lander (Managing Director and
Global Head of G10 Strategy)
indicates that most businesses
accepting BTCs are doing so
simply on a transactional basis
and are not holding them as
assets (Detrixhe, 2014a). A third
party (oftentimes Coinbase) is
used to rapidly swap the BTCs
for local currency to eliminate
the “foreign-exchange risk for
the retailer” (Detrixhe, 2014).
Regardless of the ability
to rapidly exchange, there is
the potential that a company
will hold BTCs when financial
statements are prepared; such
an instance would require rec-
ognition of the investment at
fair value on the balance sheet
and would generate an unreal-
ized gain or loss. The question
is whether those gains/losses
should be reported as part of
periodic net income (as would be
the case with trading securities)
or excluded from net income
and shown as part of compre-
hensive income on the balance
sheet (as would be the case with
available-for-sale securities).
Companies accepting BTCs
in the normal course of business
operations (e.g., for sales trans-
actions) are likely to be more
inclined to utilize those same
BTCs for payment transactions,
thereby indicating the basic
intention to sell BTCs in a short
period of time—making those
BTCs trading securities. Given
the massive fluctuations in BTC
value, periodic income could
be skewed greatly if a large
quantity of BTCs were held at
a financial statement date after
significant value fluctuations
had occurred.
Consider that the (rounded)
market price (according to Coin-
base.com) of one BTC went
from $1,117 to $723 between
Wednesday, December 4, and
Saturday, December 7, 2013. A
company holding 1,000 BTCs as
trading securities over that time
frame and preparing a set of
financial statements on Decem-
ber 7 would have had needed to
show a $394,000 unrealized loss
on its income statement.
And it is possible that hold-
ing BTCs may occasionally
be required—not because a
company desires to do so but
because of an inability to adjust
its BTC investment position.
For example, in early February
2014, Japan’s Mt. Gox (the most
well-known BTC exchange)
abruptly suspended the abil-
ity of customers to withdraw
funds “to fix a technical glitch
in its trading platform” (McMil-
lan, 2014). The exchange col-
lapsed later that month after
announcing that it had “lost”
about 750,000 customer-owned
and 100,000 of its own BTCs,
although about 200,000 BTCs
© 2015 Wiley Periodicals, Inc.
The Journal of Corporate Accounting & Finance / January/February 2015 31

appropriate to value the newly

acquired asset at the value of
Exhibit 2 what was received rather than
what was given up—creating a
difference in the gain or loss to
Predictious Bitcoin Prices on February 9 and be recognized on the exchange.
August 15, 2014 Another question is whether
BTCs, although not actually
With 10 months of the year left, the BTC “year-high bets” were as money, might be perceived as
follows: “boot” in the exchange process
if given in connection with other
In 2014, Bitcoin to reach Sell at Buy at
nonmonetary assets.
$15,000 0.62 1.99
$10,000 1.51 2.29 M&A Process
$7,000 2.13 5.74
A continuation of the
$5,000 2.71 5.99
exchange transaction question
$3,000 3.08 8.49 relates to the use of BTCs in
$2,000 3.51 9.75 merger and acquisition process.
The first major acquisition
With 4 months of the year left, the BTC “year-high bets” were as deal was in July 2013 when an
follows: undisclosed buyer purchased
In 2014, Bitcoin to reach Sell at Buy at SatoshiDice (an online dice
$15,000 0.29 0.55 game that used BTCs to gamble)
for 126,315 BTCs worth approx-
$10,000 0.29 0.55
imately $11.47 million when
$7,000 0.29 0.59 the deal closed (Ludwig, 2014).
$5,000 0.29 0.95 Erik Voorhees, the gaming com-
$3,000 0.62 1.75 pany owner, was then charged
by the Securities and Exchange
$2,000 0.85 2.65
Commission (SEC) for offering
Source: https://www.predictious.com/economics/bitcoin-new-all-time-high-2014 unregistered securities; Voorhees
settled the charges by disgorg-
ing slightly less than $16,000 in
were later recovered (Abrams, each bitcoin used in an exchange profits plus a $35,000 penalty:
2014). Another difficulty created process first needs to be com- “All issuers selling securities to
by the collapse of Mt. Gox is the puted. The likelihood of the the public must comply with the
determination of value: Which historical cost being equal to the registration provisions of the
BTC exchange should be used to current value is slim; some BTCs securities laws, including issuers
assess BTC value in the event of exchanged will generate gains, who seek to raise funds using
differing options in the market- while others may generate losses. Bitcoin [and other] digital cur-
place? The question exists, however, rencies” (U.S. SEC, 2014).
as to whether the BTC value at In late 2013, Blockchain (a
Exchange Transaction the actual date of the exchange BTC wallet company) acquired
represents the most appropriate ZeroBlock (a BTC market data
When a nonmonetary asset amount at which to account for and news app) for an undis-
is exchanged for another asset, the transaction. Given the mas- closed number of BTCs; in
the new asset should be recorded sive fluctuation in BTC valua- 2014, Blockchain also bought
at the value of what was given tions, the bitcoin recipient in the RTBTC—also all in bitcoins—
up or what was received, which- exchange process might want to and will brand that company as
ever is more readily determin- inflate the number of BTCs to the ZeroBlock Trading Platform.
able. Because each bitcoin is spe- be received to compensate for Nic Carey, CEO of Blockchain,
cifically identifiable through its a potential rapid drop in value. indicated that his company’s
private key number, the cost of In such cases, it may be more BTC acquisition deals are

© 2015 Wiley Periodicals, Inc. DOI 10.1002/jcaf

32
structured in a manner to help
protect against some level of
volatility, including making pay-
ments at several different times
because of BTC price fluctua-
tions (Bloomberg TV, 2014).
Positive aspects of using
BTCs in M&A transactions are
that payment is almost instanta-
neous (assuming that staggered
payments have not been negoti-
ated), bank and clearinghouse
fees are eliminated, and foreign
currency exchange costs can be
avoided in cross-border transac-
tions. On the negative side, the
primary concern is unpredict-
ability of BTC value as aligned
with any fiat currency; that
volatility creates significant risk
when the BTCs are converted
into those fiat currencies. Other
issues are the “lack of regula-
tory oversight and legal recourse
in the event of theft or fraud as
well as a susceptibility of the
Bitcoin network to malfunction
and hackers” (Josselyn, 2014); to
illustrate, one might simply con-
sider the collapse of Mt. Gox
and the effect on BTC valuation.
M&A agreements would
likely have to contain maxi-
mum and minimum purchase
prices stated in a fiat currency
to protect both buyer and seller.
Because of the major varia-
tions in BTC values, staggered
payments make good business
sense but could have complex
effects on valuations of tangible
and identifiable intangible—
especially those not previously
recorded on the books of the
acquiree—assets recorded by the
acquirer as well as the potential
for contingent consideration to
be involved in the acquisition.
For example, assume that an
acquirer purchases a company
whose primary asset is an app
related to BTC market data.
Mobile apps are often selling for
10 times revenue even though
DOI 10.1002/jcaf
The Journal of Corporate Accounting & Finance / January/February 2015
the companies are not yet
generating positive cash flow,
often because the company
leaders have reputations for
exciting product development
(Tode, 2012). Thus, valua-
tion of the app being acquired
should likely reflect the current
number of users, app platform,
revenue potential (if any) from
in-app purchases, and expected
growth. App valuation might
also be affected by BTC value:
significant reductions (increases)
in BTC value might reduce
(increase) the number of users.
Thus, as BTC value changes,
the total purchase price of the
acquiree could change, which
would simultaneously change
the value of the assets acquired
and the amount of goodwill or
gain from bargain purchase (if
any) to record which would, in
turn, affect future profitability.
These factors do not even con-
sider the income tax implications
related to the underlying cost of
the BTCs used by the acquirer in
the M&A process.
Disclosure Activity
The basic objective of
financial reporting is to provide
useful information about orga-
nizational activities to investors
and creditors who have at least
a basic level of comprehension
about business activities. The
full-disclosure principle indicates
that companies are obligated
to provide all information that
would likely influence the deci-
sions of an informed user in an
understandable and nonmislead-
ing fashion. Given the complex
technicalities and experimental
nature of the BTC system, the
ability of companies to provide
lucid disclosures about BTC
transactions and holdings may
be exceptionally difficult—and
the number of financial state-
ment users who currently have
even a reasonable level of com-
prehension about that system
is likely minimal. Thus, the
potential depth and breadth of
financial statement disclosures
should be of significant con-
cern to organizations dealing
in BTCs. As was the case with
Enron’s (and other companies’)
inadequate disclosure about
off-balance-sheet entities, details
about BTC transactions—as a
new business practice—could
potentially create an ability for
earnings management.
Thus, it is imperative that
companies be given some level
of disclosure guidance relative
to BTC transactions. Narrative
details could amplify the finan-
cial statement quantitative data
and thereby allow investors and
creditors to judge the possibil-
ity of “information asymmetry
between management and stock-
holders and among buyers and
sellers of the company’s stock”
as well as to reduce information-
gathering costs for financial
statement users (Chandra,
Ettredge, & Stone, 2006).
CONCLUSION
Bitcoins are not the only
virtual currency but are prob-
ably the best known. Other
cryptocurrencies include Linden
Dollar, Litecoin, Peercoin, Fre-
icoin, and Ripple. Some social
networking sites have currencies
for their own users, and there is
competition among some virtual
currencies to be the “economic
engines” for some other sites.
A specified 21 million BTC
limit by 2140 theoretically helps
to “ensure continued price
rises, thereby promoting hoard-
ing behavior that undermines
bitcoin’s transactional utility,”
although hoarding does not
seem to be highly prevalent as
© 2015 Wiley Periodicals, Inc.
The Journal of Corporate Accounting & Finance / January/February 2015 33

yet, since the BTC cap limit is
over a century away (Nugent,
2013). However, the Internal
Revenue Service’s pronounce-
ment about bitcoins’ being
subjected to property taxes and
capital gains may have given
holders “an added incentive to
hoard [bitcoins] instead of using
them” (Kroh, 2014).
The fact that the underlying
features of virtual currencies
are complicated does not mean
that accounting can ignore the
innovative field of digital cur-
rency. As the number of virtual
currency transactions and quan-
tity of organizations accepting
virtual currency rise, the need
for detailed accounting pro-
cesses and disclosures becomes
more critical. The potential for
virtual currency accounting
fraud, especially through viola-
tions of the measurement and
revenue recognition principles
of accounting, is high. There is
no accounting responsibility to
address the safety or soundness
of the currency but there is a
responsibility to provide public
information on business trans-
actions in a manner that allows
efficient and effective decision
making.
Accounting, as the language
of business, must be willing
to accept this new currency
“dialect” and provide credible
reporting conventions by which
organizations can communicate,
and investors and creditors can
ascertain, the financial implica-
tions of cryptocurrency transac-
tions, their related tax effects,
and the economic ramifications
of such exchanges.
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Cecily Raiborn is the McCoy Endowed Chair in Accounting at Texas State University (San Marcos, TX). She
has a PhD in accounting from Louisiana State University and is a Certified Management Accountant (CMA)
and Certified Fraud Examiner (CFE). Her research and teaching interests include financial and manage-
ment accounting, ethics, and fraud prevention. Marcos Sivitanides is an associate professor of Computer
Information Systems at Texas State University. He has a PhD in information systems from the University of
Texas at Austin and is a Certified Computer Professional (CCP). His research and teaching interests are in
software development, new information technologies, database design, and systems development.

DOI 10.1002/jcaf © 2015 Wiley Periodicals, Inc.

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