The Statement of Digital Assets is a standardized reporting approach that clarifies an organization’s digital asset holdings, providing a bridge between Generally Accepted Accounting Principles (GAAP) based balance sheet reporting and the value represented on-chain. SoDA provides detailed support to the digital asset entry on the balance sheet by listing every wallet and asset combination (Wallet/Asset Pair) along with business use or purpose. Fair market value is also calculated to provide a more rational sense of liquidity. Taken with a firm’s fiat holdings and select other assets, SoDA attempts to present a complete picture of a firm’s liquidity.

The ultimate goal of SoDA is to provide a lasting and transparent bridge between accurate GAAP reporting of digital assets and the details from multiple wallets, centralized exchanges, and other cryptographically-based ownership and/or custody arrangements. The first use case was delivering a full liquidity picture for managers of and investors in growth stage businesses with digital assets on their balance sheet. Additional beneficiaries now include auditors, tax planners, regulators, analysts, and many more direct and indirect stakeholders. 

A balance sheet exists to report what a business owns (assets), what it owes (liabilities) and what the ownership or equity in the business is. GAAP is the financial reporting language of business in the United States, unfortunately existing reporting standards for businesses interacting with digital assets can make the balance sheet opaque. Current practice for recording digital assets breaks several core purposes of a balance sheet – primarily understanding and assessing liquidity. The balance sheet should tell the complete financial story for an entity but unfortunately for those that hold or transact in digital assets, it does not. This inadequacy is due to digital assets being defined as indefinite-lived intangible assets that necessitates the valuation at the lower of cost or impaired value. By definition, values on the balance sheet can only be marked down, not up (or “marked to market”). 

While there has been recent FASB guidance that may require fair market value reporting of select digital assets, the new rules are not complete as NFTs (non-fungible tokens), native tokens (tokens created or issued by the reporting entity), select tokens representing real world assets (RWAs), and wrapped tokens will be excluded. This range of treatments would actually complicate balance sheet reporting with the potential of having to report both fair market value and intangible asset methodologies. At the highest level, this challenges the operation of digital asset-based businesses as questions persist regarding operating runway, tax liability, and other key performance metrics. It also makes it difficult to assess, and nearly impossible to report, a firm’s true liquidity to analysts, investors, regulators, and auditors as they are not served for similar reasons. 

Even if we apply the rules as they are, the process of calculating GAAP-compliant crypto activity is a non-trivial task and relies heavily on crypto subledger technology. These software platforms translate on-chain activity into journal entries for revenue, cost of sales, expenses and any associated realized gains/losses. Additionally, they support the balance sheet crypto entries of both assets and liabilities. 

It goes without saying that recording accurate journal entries is of the utmost importance in bookkeeping, however making sense of what is making up the entry is essential to all stakeholders and professionals that need visibility to a firm’s health. SoDA is a tool for providing this visibility as it relates to digital assets.