Bitcoin in the Charitable Sector – Part Two: Financial Accounting and Reporting Risks
Last month, my colleague Sandra Feinsmith provided an overview of Bitcoin’s developing role in the charitable sector,
noting three major questions that nonprofits should address before they forge ahead with accepting Bitcoin donations. Two of these critical questions involved the financial accounting and reporting risks that nonprofits need to manage when using Bitcoin and, on a related note, the question of whether or not the virtual currency’s value will stabilize.
When it comes to managing the financial risks associated with virtual currencies and ensuring that all donations are accurately reported, management teams and Boards should be keenly aware of the following areas of concern:
1. The value of virtual currencies is highly volatile;
2. These currencies are not backed or regulated by any sovereign government, including the U.S. federal government; and
3. There are widely-publicized reports of asset losses at exchanges.
One way to mitigate the risk of market volatility currently associated with Bitcoin is to have donations converted to cash immediately through an agreement with the third-party processing vendor of your choosing. If an organization decides to accept Bitcoin for charitable donations, a best practice is to modify its gift acceptance policy to reflect its intention to immediately convert these donations to cash.
For financial reporting purposes, Bitcoins should be treated as a financial asset, and if held, should be reported at fair value in an organization’s statement of financial position and in the notes to the financial statements. It is reasonable to expect that the fair value would be determined based upon the trading price of the Bitcoin on the applicable exchange on the date of the transaction.
Along with deciding whether or not to hold Bitcoin donations or convert them to cash immediately, it’s also critical that management and the Board understand how Bitcoins are valued, and how the third-party vendor safeguards them. The controls in place at exchanges and other locations that house Bitcoins for customers are important to ensuring that Bitcoins continue to exist. Once Bitcoins are lost, they are not recoverable, and unlike deposits held at a bank, they are not insured against loss by the government.
A sound understanding of the valuation and existence of Bitcoins is essential to accounting for the transactions and reporting Bitcoin for financial reporting purposes. Of course, Bitcoin is, for the most part, unregulated, and changes in laws or regulations could significantly impact its value, which could cause changes in market sentiment and liquidity.
Stay tuned to the blog until next week, when Laura Kalick will provide the third and final part of our Bitcoin in the Charitable Sector series: tax issues related to Bitcoin donations.