On September 6, the Financial Accounting Standards Board (FASB) unanimously voted to finalize new accounting rules on cryptocurrency assets — less than five months after the proposed standard was issued for public comment. Here’s what companies that hold these assets should know.
Need for change
The updated guidance is the first explicit accounting standard on crypto assets in U.S. Generally Accepted Accounting Principles (GAAP). It’s designed to help companies more accurately reflect the economics of such assets. The standard comes at a time of heightened regulatory scrutiny following a series of scandals and bankruptcies in the crypto sector. Volatility in the trillion-dollar crypto sector has caused practitioners to press the FASB to develop accounting rules.
Under current practice, cryptocurrency tokens are accounted for as intangible assets and reported on the balance sheet at historical cost. Those assets are deemed to be impaired when the price falls below historical cost. Impairment is based on the lowest observable value within a given reporting period, causing organizations to continuously monitor the value of these assets. If an asset’s price subsequently recovers, however, impairment losses can never be recovered.
The new standard will apply to well-known crypto assets that trade in active markets, such as Bitcoin and Ethereum. It will also be used for other types of crypto assets that don’t trade nearly as frequently (or perhaps at all). The guidance covers crypto assets that:
- Are fungible,
- Are deemed to be intangible (which excludes securities and fiat currencies),
- Don’t provide the asset holder with enforceable rights to, or claims on, underlying goods, services or other assets,
- Are created or reside on a distributed ledger based on technology that’s similar to blockchain technology,
- Are secured through cryptography, and
- Aren’t created or issued by the reporting entity or its related parties.
The term “fungible” is typically used for commodities or currencies. It refers to an item that can be freely traded or replaced with something of equal value. This condition is specifically designed to exclude non-fungible tokens (NFTs) from the scope of the new rules. In general, financial statement users have told the FASB that they don’t observe companies and nonprofit entities holding material amounts of NFTs, which may come in the form of art, music, in-game items, video clips and more.
The new rules will require crypto assets within the scope of the standard to be measured at fair value at the end of the reporting period. In addition, changes in value recognized in each reporting period will be reported as gains or losses in comprehensive income. Fair value represents the price that will be received if the company were to sell the crypto asset in an orderly transaction to a willing and knowledgeable buyer.
Under the guidance, companies will present crypto assets separately from other intangible assets on the balance sheet because they have different measurement requirements. Crypto assets will be more prominently displayed, providing investors with clear and transparent information about their fair value.
The guidance also calls for detailed disclosures on crypto holdings. For example, disclosures for Bitcoin will include the number of tokens held, the fair value and the cost basis. Organizations also must disclose information about restrictions in crypto holdings, what it would take to lift any restrictions and changes in those holdings.
The final standard will be published in the fourth quarter of 2023. It will go into effect for fiscal years beginning after December 15, 2024, including interim periods within those years, for all entities. Early adoption is permitted. Contact us to help understand how this guidance applies to your organization.
We highly recommend you confer with your Miller Kaplan advisor to understand your specific situation and how this may impact you.