Episode 55

Mackenzie Patel from Hash Basis on US GAAP Fair Value Accounting for Crypto

Mackenzie Patel from Hash Basis on US GAAP Fair Value Accounting for Crypto

What we Discuss with Mackenzie Patel

The 2 words on every crypto accountant’s lips these days are fair value.

Until now, crypto assets had to be measured at initial cost and could not be revalued at its market price. 

To make matters worse for investors, they were also subject to an annual impairment review, and any subsequent gains in the value of the asset could only be realized at the time of disposal. 

In December 2023, the FASB published an update that seeks to better reflect the economics of crypto assets, thereby allowing companies to measure crypto assets at fair value. 

In short, these new changes seek to improve the accounting for and disclosure of crypto assets so investors can make more informed decisions. 

On Episode 55, I had the pleasure to have a returning guest, one of the most highly sought-after & well-respected crypto accountants in the industry, Mackenzie Patel, the Founding Partner at Hash Basis, a crypto accounting & taxation services firm.

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Mackenzie Patel
Founding Partner @ Hash Basis

[00:00:00] Umar: Welcome to The Accountant Quits, brought to you by the Web3CFO Club, a community of Web3 CFOs sharing best practices on web3 operations. And Cryptoworth, a crypto accounting solution to help you automate your crypto bookkeeping. On this podcast, we discuss how blockchain will impact the accounting profession and how accountants should prepare themselves for the future of work.

[00:00:26] Umar: My name is Umar, your host, and even if some might refer to me as the accountant gone rogue, my job is to provide you with the blockchain knowledge you need that will be relevant for the accounting industry as a whole. 

[00:00:39] Umar: Welcome to Episode 55. The two words on every crypto accountant's lips these days are fair value.

[00:00:47] Umar: Until now, crypto assets had to be measured at initial costs and could not be revalued at its market price. To make matters worse for investors, they were also subject to an annual impairment review, and any subsequent gains in the value of the asset could only be realized at the time of disposal. With cryptocurrencies being increasingly used by companies, the FASB in the US has recently published an update that seeks to better reflect the economics of crypto assets, thereby allowing companies to measure crypto assets at fair value. 

[00:01:21] Umar: In short, these new changes seek to improve the accounting for and disclosure of crypto assets so investors can take more informed decisions. For all companies using US GAAP, these amendments are effective as from December 15, 2024. And to help you prepare for the transition, for the first time, I have the pleasure to have a returning guest on the podcast, one of the most highly sought after and well respected crypto accountants in the industry.

[00:01:51] Umar: And it's none other than Mackenzie Patel, the founding partner at Hash Basis, a crypto accounting and taxation services firm, and also an instructor on the recently launched Crypto Accounting Academy, where she teaches two modules, Block Explorers and Tax Treatments. 

[00:02:10] Umar: In this episode today, we will learn the main provisions of fair value accounting for US GAAP and how it impacts the balance sheet and income statement, the class of crypto assets this update applies to, the new disclosure requirements in the financial statements, how to prepare for the transition and much more.

[00:02:31] Umar: Mackenzie, welcome again and thanks for making the time to be here. 

[00:02:35] Mackenzie: Of course, hi thanks for having me back. I'm really excited to be here. And as you know, I love talking about cryptocurrencies, so I'm really stoked for this conversation. 

[00:02:43] Umar: Now for the listeners who didn't listen to your first episode on this show and don't have context on who is Mackenzie Patel, can you give everyone a quick snapshot?

[00:02:54] Mackenzie: Yeah, I'd love to. So when I was first on this podcast, I was working at Figment. They are proof of stake validator on a bunch of different networks. And I was leading up their crypto and their revenue accounting teams. And so that was great. That's where I pretty much learned everything that I know about crypto accounting, or at least like the beginnings of it.

[00:03:10] Mackenzie: And that was an awesome experience. But fast forward to last February, I officially launched Hash Basis. And as Umar mentioned, we're a crypto accounting and tax firm. We like to call ourselves crypto native. We only work with crypto companies or individuals that have crypto. And we help them with a whole range of things.

[00:03:28] Mackenzie: So crypto accounting, fiat accounting, tax, consulting, sub ledger implementation, like everything like that. So yeah, we love working with our customers. I also love writing content. I like writing articles. I just made my first YouTube video actually a couple of weeks ago. So that'll be coming out. So yeah, I love all things crypto accounting.

[00:03:44] Mackenzie: I also love conferences. So if you've seen me around, please come up to me and say hi. 

[00:03:49] Umar: Perfect. Now, before we speak about the new FASB update on fair value accounting, I want to provide the listeners with a refresher on how crypto accounting is accounted for under US GAAP. So basically these are accounted under intangible assets under a cost based accounting model.

[00:04:06] Umar: I mean, until now. So Mackenzie, can you please run us through what that actually means and what happens when the price of the crypto assets increases and decreases?

[00:04:16] Mackenzie: Sure. So I call these the old rules because this is what people are kind of following today until they switch over to fair value. So the old standard, I call this cost less impairment.

[00:04:26] Mackenzie: And so what this means is that you had to record your digital assets at cost on your balance sheet. Cost just means what price did you pay to acquire them or what was the price when you initially received them. But the kicker with this, and this goes back to the US GAAP rules under indefinite life intangible assets, is that anytime the price of these assets decreases, when you hold them, you have to book an impairment expense, which essentially artificially lowers or decreases the value of those digital assets on your books.

[00:04:52] Mackenzie: And so you would debit impairment expense and then credit some kind of like accumulated impairment account, which directly nets against your digital asset cost based account. So that's when the price decreases, but when the price goes back up, let's say the market recovers, it's a bull run, whatever the case, prices go up, but you can't actually reverse that impairment expense.

[00:05:09] Mackenzie: You can't write your digital assets back up. You have to stay on your balance sheet, pretty much at the lowest price that they've ever been since the time that you've acquired them. So, of course, a lot of crypto people were not happy with this because it doesn't actually reflect the economics of the situation.

[00:05:23] Mackenzie: We might be in a crazy bull run and your crypto assets might be super valuable and you can sell them for a pretty big gain, but that's not what your balance sheet shows. So it can be very misleading. And FASB heard us and that's why they came up with this new ASU. But as of the old rules, that's kind of what they were and why people were not happy with them. 

[00:05:39] Umar: Now, 2023 has been very eventful for crypto accounting under US GAAP.

[00:05:46] Umar: And I want to do stress that we are speaking for US GAAP right now, because under IFRS, you could already revalue. your crypto assets under a fair value model. So the FASB they issued this proposed ASU about fair value accounting back in March 2023. And they received a lot of comments. You were one of those CPAs submitting a comment letter and they then deliberated and released an update title ASU 2023 08 in December, 2023.

[00:06:18] Umar: So this is very fresh. So for this episode today, we'll be dissecting this ASU. I want to start with the main provisions of this update where crypto assets are still being accounted under intangibles as indefinite lived assets, but instead of the limiting costless impairment accounting model, now it's being accounted for under the fair value model.

[00:06:41] Umar: Can you explain what it means to measure crypto assets at fair value under US GAAP today? 

[00:06:46] Mackenzie: Sure. So that just means that your digital assets or your crypto assets are going to be on your balance sheet at the fair market value, which is essentially the current price. And so this is what everybody was asking for.

[00:06:56] Mackenzie: And we want to make sure that what's on our balance sheet is actually what the market says that they're worth. And so that's what we move towards now. Now, of course, the price of crypto fluctuates a lot. So any changes in this fair market value, they now flow through the income statement. So they go through earnings and the FASB calls this the remeasurement gain or loss.

[00:07:13] Mackenzie: And so high level, there's no more impairment. If your crypto assets go down, then you book that as a loss. If they go back up, then you book that as a gain. But at the end of the day, or let's say on your balance sheet, as of the end of the reporting period, what's showing on your balance sheet for digital assets is their current fair market value.

[00:07:30] Mackenzie: So it's a huge change, but I think it's a really, it's a big tailwind for the crypto industry overall. 

[00:07:35] Umar: Yeah, it's not a trivial change, but regarding impairment, does that mean accountants now, they don't have to worry at all about impairment? They don't have to carry any impairment tests annually? 

[00:07:46] Mackenzie: No, so, well, it depends on the scope requirements, which I think we're going to get to in a little bit, but if the digital assets that you have fall under the fair value scope, then you don't have to do impairment.

[00:07:56] Mackenzie: Because you're kind of already doing it a little bit when the fair value decreases, you are booking a loss there and your digital assets are going down in value. That could be seen as some kind of impairment, but on the flip side when digital assets go back up. Then you can book the gain on that as well.

[00:08:10] Mackenzie: Now, if you have digital assets that are not within the scope of the new ASU, those are still under the current cost less impairment model, and you would still have to evaluate those for impairments. At least annually, but the way it sort of works in crypto accounting is just at the end of every reporting period.

[00:08:23] Mackenzie: So let's say at the end of every month, typically a company will evaluate for impairment. 

[00:08:27] Umar: All right. So let's talk about which classes of crypto assets, these new rules would apply to. They don't apply to all crypto assets. And the ones missing out are wrapped tokens and NFTs. Initially, I didn't understand why wrapped tokens were not included.

[00:08:42] Umar: So when I read it, I, so this is what the standard says that. It would apply to this, like a bunch of criterias. And one of them are if it's created or it resides on a distributed ledger based on blockchain or similar technology. Initially, I was a bit confused, but then I understood that the asset has to be created on the blockchain itself.

[00:09:04] Umar: So I want to take a specific example for wrapped assets. Let's say I have wrapped Bitcoin. And for the listeners, wrapped Bitcoin is just Bitcoin which has been bridged, let's say, onto Ethereum. So, that means that I cannot account for wrapped Bitcoin now at fair value, if we take this specific example. 

[00:09:22] Mackenzie: Correct.

[00:09:22] Mackenzie: But before I get into the wrapped Bitcoin example, I want to first review the scope requirements that the FASB has on their new ASU. Because actually, I read it a different way for wrapped Bitcoin and wrapped tokens in general. But, just to review. I'm in order to actually meet the definition that's laid out here in order to qualify for fair value treatment.

[00:09:40] Mackenzie: First off, the crypto asset has to meet the definition of an intangible asset. And secondly, the crypto asset does not provide the asset holder with enforceable rights to or claims on the underlying goods or services. This one's really important, especially for the wrapped Bitcoin, because saying if you have a crypto asset, there's no, like, it doesn't give you any rights to anything else, which in my mind for wrapped Bitcoin, it gives you a right to redeem a Bitcoin.

[00:10:03] Mackenzie: So that's why I think wrapped tokens kind of, they don't qualify for fair value treatment because of that scope number two requirement. Scope number three requirements is the one that you mentioned, the crypto asset has to reside on a blockchain, essentially, the next two has to be secured through cryptography, which kind of makes sense, you know, the most digital assets are going to meet that.

[00:10:22] Mackenzie: The next one is that the digital assets have to be fungible. And so this is where the FASB is like, okay, we are purposely excluding NFTs from this provision. And the last one. Which I think is really interesting is that the digital assets are not created or issued by the reporting entity or its related parties.

[00:10:39] Mackenzie: And so with this one, I read that as governance tokens are going to be excluded from this or basically any entity that issues their own token. They're not eligible to account for that token under fair value. They're going to have to do it under the old cost less model. So going back to your question or example about wrapped Bitcoin, you would not be able to account for it at fair value because I think it violates scope requirement number two, which is again, do not provide the asset holder with enforceable rights or claims on something underneath it.

[00:11:05] Mackenzie: And so with wrapped Bitcoin, when the user has it, they have the expectation or the right to claim Bitcoin for that or unwrap it for Bitcoin. And so it wouldn't really apply there. You'd have to do impairment on that. The same can be said for things like stable coins. I think a really good one that comes to mind is Circle.

[00:11:21] Mackenzie: So when you get one USDC, for example, like the idea is that you can redeem it for one USD. And if you look at Circle's website and their docs, it leads you to believe that you have a right to do that. And so stable coins would also be excluded from this, but luckily they're usually one to one to a US dollar anyway, so there's not really a lot of changes in their market value going on over there.

[00:11:42] Mackenzie: So also some other things that are excluded NFTs and governance tokens that we, that we mentioned. So there are some notable exceptions, but overall the scope requirements do cover most of the tokens that most companies have on their balance sheets, but it's definitely worth noting these exceptions because you're going to have to do different accounting for them.

[00:12:00] Umar: All right. Thanks for clarifying wrapped assets. I understood it differently. Moving on to the new disclosure requirements. So these revised standards, they mandate now detailed disclosures for both your interim and annual period. Could you walk us through some of these disclosures and if possible point us to what's mandatory and optional and what's required for your annual and interim period?

[00:12:27] Mackenzie: Sure. So I actually love the new disclosure package. I think it provides much needed transparency into the financial statements and it's items that most subledgers or the crypto accounting softwares already provide. So yeah, I think the FASB did really good on this one. And in terms of the disclosures, I break it down into two buckets.

[00:12:44] Mackenzie: So the first one are annual and interim disclosures. So these are required both at, like, throughout the year and also at the end of the year. There's disclosures that are just annual that need to be reported. These are all, these are mandatory, both the annual and interim. 

[00:12:58] Mackenzie: And starting with those, so on both the annual side and throughout the year, the company that has crypto assets has to report their name, the cost basis, the fair value, and also the number of units. So basically the number of tokens that you have for each significant crypto asset holding, and also the aggregate values for anything that's not considered significant. And so what I think is really interesting is that the FASB actually didn't define what is significant.

[00:13:23] Mackenzie: They didn't give a threshold like 10 percent or has to be greater than 10 percent of total holdings or whatever the case may be. They just said it's up to the accountant's judgment to figure out what's significant, which is so typical of the FASB because accounting is very estimate and judgment based.

[00:13:38] Mackenzie: It's not black and white like people think. So, yep, on annual and interim, you have to disclose those, those items. And then also, I think it's really cool that if you have any tokens that are subject to, they call them contractual sale restrictions, but I think of that as just like a token lockup. 

[00:13:53] Mackenzie: So let's say there's an investor. And they invested early into a protocol and then they were given tokens, but those tokens are subject to an unlock schedule, then that investor would then have to report that as part of a disclosure. So they'd have to say like what the nature and also how long the tokens are locked up for, and also what would cause the tokens to become unlocked.

[00:14:14] Mackenzie: So maybe there's certain unlocked dates or targets that have to be met. So I think that's really, that's, it provides some great information. Cause you can kind of look at the, not the cash flows, but the token flows for a particular organization and see when a batch of tokens are about to unlock. So, those two things with the unlock and then just the information like the name, cost basis, their value, etc.

[00:14:35] Mackenzie: Those are required both on an annual and an interim basis. Now if we go down to the second bucket, which are disclosures that are just required on an annual basis, there's a couple of them. So the first big one, which I actually did a whole presentation on and I'm obsessed with this disclosure. It's the Roll Forward.

[00:14:52] Mackenzie: I love it. I think it's just a really awesome tool that digital assets desperately needs. They have to do the annual roll forward, which is just looking at what's the beginning balance of tokens. What did you add to it? What did you dispose of? And then what's your ending balance? And you have to do this in USD essentially.

[00:15:09] Mackenzie: So you also have to factor in gains and losses throughout that happened throughout the period. And it's not just the numbers that the FASB wants. They also want a description of what did you add and what did you dispose of? And so you really have to be intimately familiar with the digital asset operations of a company, because you have to break it down to the buckets.

[00:15:27] Mackenzie: Like for any additions, did you purchase digital assets? Is this revenue? Did you invest in something and you got a return back from it? And so you have to break it down that way. And then the same on the disposition side. Did you pay contractors, did you again, invest in another project. So you really have to know what's going on and you're, whoever's reading your financial statement, they're going to see that as well.

[00:15:49] Mackenzie: So that's probably the biggest one that you have to do on an annual basis. And then FASB also wants to know your cost basis method, and so did you use FIFO, LIFO, weighted average, specific identification, etc. You have to disclose that annually. So those are the biggest disclosures, or the ones that the FASB has in the new ASU, but overall I'm actually I'm a big fan of them, and I don't think it's, of course, you know, anything that the accountants have to do, it's going to be an extra lift, but as I mentioned, I think the subledgers that accountants use, like they should provide pretty much all of this data, and so if you're keeping up with your subledger and maintaining it, then pulling this data on an annual and interim basis shouldn't be much, much additional burden, in my opinion.

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[00:18:06] Umar: Alright, so this was actually one of my follow up questions was did you have any initial concerns when you read these new disclosure requirements, I mean, apart from the fact if these accountants are using these sub ledgers, I mean, they should, you said they should already have this information ready at hand.

[00:18:23] Umar: Is there anything else that you see perhaps like a burden for reporting? And that can be like a blocker for companies to engage in digital assets. 

[00:18:33] Mackenzie: Right. If the company doesn't already have a clean subledger, then I think that's probably a big blocker and they're going to spend, or the accounting department's going to have to spend a lot of time getting that up to speed.

[00:18:43] Mackenzie: But it's, it's not like it's an unnecessary burden because you have to do that to have clean numbers and clean financial statements anyway. So it's kind of just, it's table stakes to have crypto subledger. Now there's some other things which I'm not necessarily concerned about. In fact, I kind of like the flexibility, for example.

[00:19:00] Mackenzie: The company gets to determine what is a significant holding. I actually, I quite liked that flexibility. And then also in the ASU companies can either expense or capitalize gas fees. They can choose that freely up to the company. Again, that's does reduce comparability to some extent, but also gas fees tend to be de minimis anyway, or just like smaller than most of your other crypto activities.

[00:19:22] Mackenzie: So. I don't think it's a huge problem and then there's some other flexibility like early adoption is permitted, which I think we're going to talk about later. So overall, not, not a ton of initial concerns. I just, the common dread throughout this though, is that now we have two paradigms for accounting for digital assets.

[00:19:37] Mackenzie: You have costless impairment and then you have the fair value. And so I think inherently that does create more work for the company because they essentially have two methods for accounting for what essentially is the same asset at this point. And so that I think can, can generate some additional burden and some concerns because the really the it's on your sub ledger now to be able to support both methods of accounting within the same database, which I'm curious to see how that plays out.

[00:20:04] Umar: Okay. All right. So I want to move on and speak about how companies should prepare for this new amendment and the transition period. So the new standards I mentioned in the intro. So they offer an option for early adoption after December 14th, 2023. And adoption is mandatory for all entities starting December 15th of this year.

[00:20:26] Umar: So first I want to speak about the adjustment required in the opening balance of your retained earnings. And we can go through a very simple example. Let's say company A has a year end of 31st December and for the year ending 31st December 2023, they want to opt in for early adoption. How should they adjust their opening retained earnings balance for their 2023 accounts?

[00:20:51] Mackenzie: Right, so I can give you sort of the simple formula here, which the FASB also wrote as well. So you have to look at the difference between the fair value as of the beginning of the year. So let's say fair value on January 1, 2023. And you have to subtract from that the carrying value as of December 31, 2022.

[00:21:10] Mackenzie: And so the carrying value, just to define that, it's just your cost basis minus any impairment that you've booked so far. So we call that the carrying value. And so you're just comparing basically what's the fair value and then what, what do I currently have on my books at the carrying value. And then that difference is then going to be the adjustment that hits your retained earnings as of January 1, 2023.

[00:21:32] Mackenzie: So I actually, I came up with a quick example, which I hope does not confuse people, but this is just the way that I was thinking about it. So I'm going to give you some facts, I'll go nice and slow, but these facts are as of we're saying December 31st, 2022, so we're saying as of the end of the year, the cost basis of your digital assets is $10million.

[00:21:52] Mackenzie: And the cumulative impairment that you've booked so far is $7million. So just to do some quick math, this means your carrying value is $10million minus $7million, which is $3million. Again, carrying value is just cost basis minus impairment. But if we look at what the fair value of the cryptoassets are, basically a date later, on January 1, 2023, the fair value is $5million.

[00:22:14] Mackenzie: So if we just do the quick math, the fair value, $5million minus carrying value, $3million, there's going to be adjustment of $2million. That's going to hit your retained earnings. And so I was trying to think about this from the journal entry perspective, actually, because that's how I kind of understand the world, honestly.

[00:22:29] Mackenzie: So what I was thinking is that you actually have to clear out all the impairment that you've booked so far, because you don't, you're basically reversing any impairment that you booked. And so in our case, we're going to debit the cumulative impairment. We want to just clear it out and get rid of it. Now we also want to credit retained earnings for that difference because the FASB, they gave us that, that formula for determining the adjustment.

[00:22:50] Mackenzie: And as we just went through that adjustments $2million. So we're going to credit retained earnings for $2million. And then the difference then between the debit and credit is $5million. And that's going to go to digital assets or some kind of like contra digital asset account, like a digital asset fair value adjustment account.

[00:23:05] Mackenzie: Because then all in all, at the end of the day, then, your digital assets are going to be on your books for $5million as of January 1, which is the fair value, which is what they should be at. So that's an example. Hopefully you're able to follow that, but high level, just you need to reverse out the impairment.

[00:23:21] Mackenzie: Book the adjustment to retained earnings and the difference is gonna go to your digital asset account to get it back up to the fair value. So that's all I'm thinking it's gonna go. You know, you could credit your digital assets directly, but if you look at the disclosure requirements, you still have to report the cost basis of your digital assets.

[00:23:36] Mackenzie: So I think you want to maintain the integrity of that account and just keep it the cost basis and not mix in these fair value adjustments. You can put that in a separate account, kind of like we did with impairment. So any questions on that today? Did that make sense? 

[00:23:49] Umar: Yeah, it's very clear. 

[00:23:51] Mackenzie: Okay, great.

[00:23:52] Mackenzie: Yeah, I think we're all going to go through this together. Okay, awesome. 

[00:23:59] Umar: Now, a lot of times when I hear people or accountants starting to use digital assets and they are still doing their accounting, like on spreadsheets, there are many tools you could use like in crypto accounting, operations, but the one tool I always recommend is to start with a subledger.

[00:24:18] Umar: Now, a lot of these subledgers do offer the option to fair value your crypto assets. So would you advise our listeners to pay special attention to maybe one important feature that these subledges must offer for a smooth transition? 

[00:24:36] Mackenzie: Yeah, definitely. And when you said spreadsheet, I really had like a visceral negative reaction.

[00:24:40] Mackenzie: You should not be doing crypto accounting on a spreadsheet unless you have like two transactions a month or something. But even then, like, you need to get a subledger. And so when you're looking to make this change, you have to ensure that your subledger can actually, like, can actually do it with you.

[00:24:54] Mackenzie: They can actually do the change. But one feature that's important is that they need to be able to delineate between the digital assets that are accounted for under the old model, and then also under the new model. So there needs to be flexibility there. So you can pick which ones get which treatment. So I'm imagining, and I haven't really seen subledgers that have this yet, but they're probably coming out with it.

[00:25:12] Mackenzie: Like just a screen that lists all of your different assets. And then there's like a toggle button that says. Okay, I want ETH to be under fair value, but I want wrapped Bitcoin to be under the impairment model. And then just doing that asset by asset analysis and, and picking which ones you want. And then behind this, of course, I recommend the company has some kind of policy or memo that describes or goes into their decision making process.

[00:25:34] Mackenzie: Cause let's say maybe they have their own token. Definitely don't want to do that under fair value. You want to make sure that's under cost. And so subledgers really need to have that because, as I mentioned before, then you're going to have two sets of, of everything, right? Like you can have different roll forwards.

[00:25:47] Mackenzie: So you gonna your fair value role forward and your costless impairment, or kind of like the old roll forward that we, that we use now, they're going to have to be able to give you all the information you need for the other disclosures. Like what's the cost basis of these, what's the value. So they just.

[00:26:01] Mackenzie: They really need flexibility there. And I really hope that they can implement this smoothly and on time for everybody. And also, I mentioned, um, now we have the option to expense or capitalize gas fees. And I think most self ledgers also give you that option now, but if they don't just make sure that, that they, that they do, cause maybe you want to expense for whatever reason, or maybe capitalize, but make sure that they can just handle both because you have, you have some leeway there.

[00:26:24] Mackenzie: So I really think that's the biggest thing though. Make sure your subledger can take it all the way with you, depending on your asset holdings. 

[00:26:30] Umar: Perfect. I hope the subledgers are listening to you right now. I mean, if not, I can create a snippet of this recording and just tag them on social media. 

[00:26:39] Mackenzie: Yeah, dude, just blast it out.

[00:26:40] Mackenzie: Like y'all, like we need, we need this.

[00:26:44] Umar: Now to move on to speak about your cashflow. So the statement of cashflow, any changes there? So these revised standards. As I understand, they do not change the presentation requirements for the statement of cash flows, but they do require specific presentation of cash receipts arising from crypto assets that are received as non cash consideration and are converted immediately into cash.

[00:27:10] Umar: I mean, I got that directly from the standard. Can you provide the listeners with a practical example of what this actually means? 

[00:27:18] Mackenzie: Sure. So just to break that down a little bit, cause there's a lot of terms in there. So non cash just means not, basically not cash. So like crypto would fall under this.

[00:27:27] Mackenzie: And then consideration is a term that we use within like revenue recognition. Think of ASC 606. So saying if you get crypto as revenue, let's say from contracts with a customer during the course of your trade or business, and then you take that and you immediately swap it or you off ramp it into fiat.

[00:27:45] Mackenzie: Then if you do that, the cash that's then received from that transaction, it goes into cash from operating activities in your statement of cash flows. So you have your operating activity, financing, investing. So, so that cash would go in the top part of your statement of cash flows. And FASB, they actually give you a definition of what nearly immediately converted into cash means.

[00:28:04] Mackenzie: Cause of course that's subjective and you can use judgment there, but they said, I'm quoting from them refers to a short period of time that is expected to be within hours or a few days rather than weeks. So if you get crypto as revenue from a customer, then you convert it, let's say a day later, then that's considered cash from operating activities.

[00:28:24] Mackenzie: Now, just to give you a practical example, let's say you have a validator, which is always my favorite go to example. And this validator is receiving staking rewards and commission once a week, but within a few hours of the deposit hitting their account, those crypto assets are then bridged into Kraken, let's say, and then they're immediately exchanged for cash.

[00:28:42] Mackenzie: And so that cash will then be classified as cash from operating activity. And interestingly, this also links back to our role forward. That whole segment or the whole sequence of transactions would be excluded from the roll forward since it was then it was converted to cash pretty much right away. And so I think that's, that's kind of interesting that the FASB calls that out and says, Hey, you can exclude that from the roll forward.

[00:29:04] Mackenzie: But then my first thought is, okay, how are the subledgers going to know that? And how are they going to exclude that from your roll forward. And so I think the FASB wanted to do that to be, you know, to be nice to the accountants, but I think it actually might end up being more work unless the subledgers again, there's like another setting we can toggle that says, oh, if something's converted to cash within like two days, and you excluded from the roll forward, there's going to be a lot of backend engineering work to be done there.

[00:29:27] Mackenzie: So accountants are probably going to manually back that out. Yeah, that's the statement cash flows provision or changes that they gave us. 

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[00:31:17] Umar: Perfect. So I want to move on and speak a little bit about Hash Basis.

[00:31:20] Umar: Now, the first time we spoke on this podcast was in June, 2022. And at the time you said in the, at the beginning of this episode, you were still working at Figment, the staking solution for institutions. Early last year, you launched Hash Basis, crypto accountancy and tax practice. Can you share an overview of the different services you provide and whether these companies, let's say, have to be US based?

[00:31:45] Mackenzie: Yeah, it's been a total whirlwind. My life a year ago looks very different than my life now, and honestly, I love it. And I'm just, I'm really grateful for everyone, everyone that I get to work with and everything that I've learned this past year. I just, I can't wait for it to get even better. So we offer a range of services.

[00:32:01] Mackenzie: We do kind of a lot right now just because there's not a lot of other crypto accounting providers out there. So when a customer comes to us and they need our help, and it's something that we feel confident doing, then we are going to help them. So that can include, of course, crypto accounting. So doing monthly books for all the crypto transactions.

[00:32:19] Mackenzie: We also do fiat accounting because I realized most of crypto startups, they don't just have crypto. Most of them all have cash as well, because that's the, that's what they're receiving from their investors. So we have to learn to do all the fiat accounting. I'm going to say like bank recs, payrolls. Once you've done crypto accounting, the fiat accounting just is a lot simpler, in my opinion.

[00:32:37] Mackenzie: We also do business tax returns. So C Corp, S Corp partnerships, I recently, took on a part time tax contractor. So really looking forward to expanding that service. And I think it makes sense to keep accounting and tax kind of under the same umbrella because the two are very related. You can't be in silos.

[00:32:53] Mackenzie: Accounting impacts tax, tax impacts accounting, et cetera. We also do sub ledger implementations. So if a customer, they, let's say they don't have a sub ledger set up yet, but they really need one, then we'll help them select the right provider based on their digital asset activity and help them get it set up.

[00:33:08] Mackenzie: So that just means scrubbing all their data to date, categorizing it, running all the reports, making sure it's being pushed or uploaded to QuickBooks via journal entry. And so we'll walk them through that whole process. And I love sub sub ledger implementations. They take a long time, but it's honestly so satisfying, like helping a customer through this process, because it can be, it can be a stressful one and one that kind of drags out.

[00:33:28] Mackenzie: And then we also just do ad hoc stuff, like anything crypto related. So like bespoke reconciliations. I have some customers that they just have random accounts that, like, like crypto wallets that they just need help reconciling. It's kind of like a one off project. Love doing those. And also we've explored some, like a consulting related to revenue recognition policies around digital asset activity and walking customers through their transactions and how that relates to 606 and assisting them with writing their RevRec memos.

[00:33:55] Mackenzie: So yeah, as you can see, we've done a lot. And then to answer your second question, most of our customers are indeed US based. For context, I'm based in San Francisco and my CPA license is in Florida. So US GAAP was kind of my bread and butter, but we will take on consulting and accounting for international businesses.

[00:34:13] Mackenzie: We just won't do tax cause that's like completely different for US versus international, but yeah. So far we've worked with a bunch of different verticals, for example, on DeFi, DAOs, Layer one protocols. NFT platforms, gaming, staking, private key, crypto payments, Layer 2s, basically like everything under the sun it feels like we've worked with.

[00:34:32] Mackenzie: I haven't worked in the mining yet that's on my list to do this year because I think they're really fascinating but yeah we've seen a lot and it's all just so it's so fascinating I really love what I do so yep that's that's Hash Basis.

[00:34:42] Umar: And when we spoke before the episode, Mackenzie mentioned that so Hash Basis is recruiting right now.

[00:34:49] Umar: Can you, I mean, if people listening, they are looking to transition into crypto. What's like requirement to let's say, start working in crypto accounting at Hash Basis. 

[00:35:00] Mackenzie: Yep. So we're looking for a senior accountant to come and help us out with our, our accounting customers. And so my main criteria really is that the candidate has insane curiosity.

[00:35:10] Mackenzie: Because crypto is just so new and you just have to do a lot of digging. There's not a lot of docs that say, hey, this is exactly what you need to do for this situation. You have to be comfortable with the unknown. It is really curious and driven to figure, to figure out the problem. And so that's really the main thing.

[00:35:26] Mackenzie: A CPA license would be great, but really it's seen like someone who's really comfortable with senior accountant duties, US GAAP. You don't even have to know crypto. I'm more than happy to teach that if you are really curious about it and you want to learn more and yeah, we are, we are kind of a startup, right?

[00:35:40] Mackenzie: So being just like comfortable with, you know, with the unknown and the type of startup fast pace environment would be great. 

[00:35:47] Umar: Now for listeners who are, let's say their accounting is in a total mess right now and they want to have their financials in a more compliant way. Could you provide us a walkthrough of how you would onboard a new client with crypto on their balance sheet from, let's say the time of understanding their business model, their token inflows, outflows to subledger implementation, to financial reporting. How does that process 

[00:36:13] Mackenzie: looks like? Right. So we have a pretty robust process now, starting from the initial sales call to when we actually onboard the customer if they want to sign with us.

[00:36:21] Mackenzie: So the first thing is I always ask just basic crypto housekeeping questions as I call them. So how many wallets do you have? What networks are you on? What's your volume? What exchanges, custodians are you on? And also just what activity are you doing on chain? As you just sends and receives, are you doing some DeFi, just like weird stuff that I need to know about?

[00:36:39] Mackenzie: And also, do you already have a crypto subledger set up because that will kind of form what services we provide. So that's the first thing, and usually after we send an NDA, customers will send us their on chain addresses and we can just poke around ourselves, just go to Etherscan or whatever, block explorer, and just see for ourselves what people are doing with their crypto on chain.

[00:36:57] Mackenzie: From there, we do a token flows diagram, either like an actual diagram that I'm drawing on a piece of paper. Or just to call the customer to make sure that we're understanding what they're doing with their crypto. And also what I love doing, this applies to customers that actually have a product or a protocol, is we just test it out ourselves.

[00:37:14] Mackenzie: I have a Hash Basis testing wallet, and I just go through the whole protocol, I do test transactions, and I create like internal training videos for Hash Basis. We have like our own knowledge based wiki. And I send that to the customer and I say, hey, did I understand this correctly? Is this actually how your protocol works?

[00:37:31] Mackenzie: Cause as I've always said, if you don't understand how like the project works or what's happening on chain, the accounting for it's not going to be correct. So you really need to understand the nuts and bolts and the guts of what's happening to get the journal entries correct. So once you do that, then we kind of engage in a subledger conversation if they don't already have one.

[00:37:47] Mackenzie: So just figuring out which one will be best to your needs and then we help them implement it and things that come along with that like wallet hygiene, wallet security, best wallet setup, etc. So that's kind of the crypto process and then of course, there's kind of like a mirrored process on the fiat side.

[00:38:03] Mackenzie: So we need to know what their fiat tech stack is. You know, what banks, what's their payroll, credit cards, things like that. But as I said, the fiat side is just, a lot easier, I think, than the crypto side. 

[00:38:14] Umar: Now, there's not so much time left for the episode today. And I want to go through the last topic, which is on your different areas of interest in crypto accounting today.

[00:38:25] Umar: Ever since I started The Accounting Quits and over the years, I've read a fair share of resources on crypto accounting, but the articles written by you, Mackenzie, I always find them like to be on a whole different level. The one that comes to mind are your articles, let's say on the accounting implications on The Graph protocol, or the most recent one you wrote on Axelar.

[00:38:44] Umar: Now you're undoubtedly setting the standards for the modern web3 accountant. You said they need to have an insatiable level of curiosity, and I completely agree with you. I wanted to ask you what are some like in the web3 world today and in recent times, an area that you're particularly interested in and maybe keeping an eye on that can be accounting, tax or anything else.

[00:39:08] Mackenzie: I actually have two answers to this. One that is more like in the accounting world and one that's just a project that I've been keeping up with that, that I find to be really interesting. So on the tax side, I've been really into form 8300 recently. I actually just released an article yesterday that dives all into it, because I don't know what happened, but on January 2nd, it seems like everyone on CryptoLinkedin started freaking out about Form 8300.

[00:39:32] Mackenzie: And just for context, there is a new requirement for the Infrastructure Act that says if you receive digital assets that are $10,000 or more, then you have to report it on Form 8300 and get submitted. And to e file it with the FinCEN through their, through Bank Secrecy Act, so really scary and unofficial sounding.

[00:39:50] Mackenzie: And people were freaking out because there's not actually a good way to do this yet. Like on form 8300, there's no section that says digital assets. So it's like, well, do I check the box next to cash or next to bank draft or cashier's check? And you literally can't like upload it now. And then there's a lot of questions like, well, what if I got an airdrop, you know, in the course of a trader business, then how do I know, like, how do we get the social security number of the person that gave me the airdrop?

[00:40:13] Mackenzie: Because that's what you have to report. So I went down a total rabbit hole on that. And this is part of the general regulations that are happening in crypto right now. And just a prime example of the government coming out with regulations, but not telling us how to comply with them. So I ended up calling the IRS because I was like, this is ridiculous.

[00:40:29] Mackenzie: Nobody knows what's going on. And the agent that I talked to said, We don't actually, like, if you get $10,000 or more worth of crypto, you don't have to report it yet. You have to wait for the IRS to actually release like implementation guidance on how to actually do this. So that was comforting that, you know, hopefully we're not going to get punished for not doing this yet, but there just was a lot of, you know, fear, uncertainty and doubt around this.

[00:40:50] Mackenzie: But just to clarify, if you're just an individual doing crypto on the side and you get an airdrop worth, let's say 20 grand, you don't have to do anything. This whole, like these requirements only apply to trades or businesses. And so if you're just an individual, you don't have to do anything that IRS isn't or the FinCEN, they're not going to come after you.

[00:41:06] Mackenzie: So. Just a heads up on that, but been really into that recently, went down a complete rabbit hole, which is very random. That's how I spent my weekend, but that's the first one. The second one is a project that I've been keeping up with, and it's called Titles, and I think it's really interesting because it's an intersection between Crypto and AI, which I think we're going to see a lot more of.

[00:41:26] Mackenzie: And of course, AI it's under total hype cycle right now, but obviously it's, you know, we're already using it day to day and the project, which is called Titles, they let you remix artwork from different artists to create your own NFTs. So let's say you create your own NFT, but you can sample from different artists their AI models to create your own artwork.

[00:41:45] Mackenzie: And then whenever somebody mints the NFT you created or they purchased it from someone else, then those artists that you sample from get a derivative fee from whoever purchased it. So it's just, it's really great for attribution and it just combines blockchain and AI, which I think we're going to see a lot more of.

[00:42:02] Mackenzie: And it's just, it's just really interesting technology. And I'm really happy to sort of be a part of this industry and this movement. So those are the two things that I'm, I'm looking out for right now. Wow. 

[00:42:13] Umar: That's cool. That's insane. I know. I didn't hear of this project. How do you spell it? Is it titles?

[00:42:17] Mackenzie: Titles. Like, like a title to a car. So titles. xyz. 

[00:42:21] Umar: Yeah. Okay. Wow. I'm going to check it out. Awesome. Yeah, you definitely should. Mackenzie, so we've come to the end of the episode today. Has there been anything pertaining to fair value accounting that you wanted to mention that we didn't touch on perhaps today?

[00:42:38] Mackenzie: I think we covered most of it. Just I want to impart on the listeners that make sure you read the scope requirements and upfront do the analysis of what's included and what's not included. Cause if you get that wrong, then then the accounting is going to be wrong. So make sure to go through step one very thoroughly.

[00:42:54] Umar: Perfect. You do know how I usually like to end my podcast. I mean, I usually ask, like to ask the guests for a quote or Maxim. The first time you came on this podcast, you actually shared two quotes. The first one was a Maxim that you shared was to try things that scare you the most. This was in June, 2022.

[00:43:12] Umar: And I'll say with what you've achieved with the Hash Basis in just one year, you've clearly demonstrated that you are putting your money. where your mouth is. The second was a quote from Cicero, Stoic philosopher, who said, if you have a garden and a library, you have everything you need. So you have already provided us with two wonderful quotes and maxim.

[00:43:33] Umar: Now I want to ask you maybe a different closing question, which I don't usually ask, which is, have you had an apparent failure in 2023 or before that has set you up for later success? 

[00:43:47] Mackenzie: Yeah, but I really love this question, especially because I failed a lot last year, but that's just part of starting your own business.

[00:43:53] Mackenzie: And it was very, it was a very humbling and experience, but I also learned a lot. So yeah, my failure is going to be related to Hash Basis, but I didn't actually like hire anybody in 2023. And I feel like I kept saying that I was going to. But I just, I never felt like I had the time and I think I kept subconsciously putting it off.

[00:44:10] Mackenzie: So that did feel like a failure to me in the Hash Basis because I really wanted to grow the team, but for some reason I just didn't. And I feel like I couldn't, but looking back now, I'm actually kind of glad that I didn't hire in the first year because we were a bit messy. Like our processes weren't really put together.

[00:44:26] Mackenzie: I was just figuring out how to be a business owner. I mean, I still am. There's a lot of things I'm still learning. So we have a lot better processes now and I feel like I have a lot more vision. So I think when we do eventually hire someone, hopefully this year I'm manifesting it. They're going to come into a place that has a lot more vision and direction because my vision, which I'd love to share with you is I really want Hash Basis to be the premier boutique accounting firm and tax firm in the US. 

[00:44:51] Mackenzie: My goals are not to be this like huge firm. I don't want to be like a Big4 competitor, mid tier, anything like that. But I really would love to have a team of 10 to 15 people that just are really on it and just deliver unparalleled quality to our crypto customers. Cause that's what I really think that our crypto customers need right now.

[00:45:10] Mackenzie: Just because there's so much going on in the industry. So that's my vision. Hopefully I'm a, I try to deliver on it and get close to that vision every day. And, and definitely like bringing someone else onto the team as part of that for this year.

[00:45:21] Umar: I don't see at all why that should not happen. I mean, you've been doing a phenomenal job.

[00:45:26] Umar: You're very well known in the industry. You get called on at conferences all the time. Like I said, you're highly sought after. And also I, I mean, before we end the show, I really want to thank you for your contribution to the Crypto Accounting Academy. You're a teacher on not one, but two modules and the listeners, I mean, they wouldn't know this, but I had finalized the list of listeners, not listeners, but instructors for the academy.

[00:45:51] Umar: And unfortunately one instructor dropped out and Mackenzie volunteered to replace that person. So I really can't thank you enough for your support for this academy. And also likewise, we are in a way, both working towards crypto adoption. I'm more working towards bringing more accountants and just educating people with The Accountant Quits, which you're also a part of.

[00:46:16] Umar: So I'm very grateful to have you on board. 

[00:46:19] Mackenzie: Oh, thanks for having me. And I love crypto taxes and like you, I love educating people on crypto accounting. I think it's very necessary because most normal accountants are, they would not touch crypto with like a 10 foot pole. So I'm trying to change that. And yeah, I love the Crypto Accounting Academy.

[00:46:34] Mackenzie: If anyone's interested in learning more about crypto accounting and tax, like I would highly recommend joining it. So hopefully everyone will, will be part of one of my courses.

[00:46:41] Umar: Before we go, if people want to reach out to you, if people want to send their CVs to Hash Basis, how should they do so? 

[00:46:49] Mackenzie: Yeah, you can find us if you go to Hash Basis.xyz, that's our website, there's a submission form there. So you can reach me through there, I'm also on LinkedIn, just Mackenzie Patel, my name. And I post a lot of just random crypto accounting content on there. So feel free to reach out to me there. 

[00:47:05] Umar: Perfect. Well, it's been wonderful chatting with you today, Mackenzie, and we'll stay in touch and we'll speak very soon.

[00:47:11] Mackenzie: Of course. Talk to you later.

[00:47:12] Umar: Thank you. I would like to thank everyone for listening to this episode. You will find all the links of the episode, show notes, and transcript on the website of The Accountant Quits at theaccountantquits.com. 

[00:47:24] Umar: Please note that this content is for general information purposes only and is not a substitute for consultation with professional advisors. If you do know anyone who could benefit from the episode and you care about them, please do share the episode with them. All the episodes are available on Spotify, Apple Podcasts and Google Podcasts and by leaving us a review and rating, you will support the channel and all your fellow accountants.

[00:47:51] Umar: In order to be notified each time we release a new episode, do follow us on Instagram and LinkedIn. We hope to have you with us next time. Next time, bye for now.

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