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The FASB on May 11, 2022, unanimously voted to add a project to its technical agenda to develop recognition, measurement, presentation and disclosure guidance for cryptocurrencies, a subset of digital assets.

The topic has become sufficiently prevalent to warrant accounting rules that reflect the underlying economics of those types of assets, the board said.

“The prevalence of the issue is broad throughout the economy – not necessarily public companies – but I think given its breadth in the economy I think it’s important to address,” FASB member Fred Cannon said.

“We have to recognize this is a very rapidly evolving asset class - it’s going through quite wild gyrations,” said Cannon, one of two analysts on the board. “And it feels like, and again this is just my view, we’re either at the end of the beginning of adoption of a new technology, or the beginning of the end of some speculative excess, not sure, maybe both of those or maybe neither but we have to recognize that this is rapidly evolving and we want to allow for some adaptability of accounting standards to that evolution.”

The decision is contrary to the board’s overseas counterpart, the IASB’s view that a comprehensive project for its IFRS standards “would be complex and maybe premature, given [that] such cryptoassets and liabilities are part of a new and rapidly evolving ecosystem,” and as well differs from the FASB’s vote two years ago – same things considered.

Different this time, however, is the SEC’s push and Staff Accounting Bulletin (SAB) No. 121, issued late March on accounting for obligations to safeguard cryptoassets held for platform users. Recently, SEC Acting Chief Accountant Paul Munter pressed the board to prioritize the topic, stressing his office has been pulling in a high volume of consultations in the area, many of which are complex.

In adding the project, FASB members acknowledged that scoping the topic is going to be challenging, including weighing the application of ASC 820, Fair Value Measurement, in light of the volatility of the crypto marketplace. Specifically, in November 2021, crypto reached a market cap of $3 trillion dollars but dropped by one trillion to $2 trillion by March this year.

“I recognize that with highly volatile assets fair value is a very unforgiving model – it is,” FASB Chair Richard Jones said. “That being said I think that transparency is also very important to people so they can make their own decisions, and so I would be very interested as we pursue this in seeing how we can provide that transparency in the accounting, which I think is very important here, not just in the disclosure,” he said.

Board tackling a new agenda

The topic is being discussed at a time when the board is developing its five-year technical agenda, which generally is set based on three factors: whether there is an identifiable and sufficiently pervasive need to improve U.S. GAAP; whether there are technically feasible solutions and the perceived benefit to those solutions are likely to justify the expected cost of change; and whether the issue has an identifiable scope.

Interestingly, U.S. GAAP already have the rules in place for digital assets, according to the discussions.

“I think GAAP does have guidance on accounting for nearly any asset you can think of,” FASB Vice Chair James Kroeker observed. “If an asset is a security we have guidance, if an asset is an intangible we have guidance, if an asset is inventory we have guidance. I would say GAAP does have accounting guidance for digital assets,” he said.

The AICPA’s nonauthoritative paper on the topic “simply pointed people to the authoritative points in GAAP that tell you the accounting for different types of assets including digital assets that are securities and digital assets that are intangibles,” Kroeker said. “And so all the discussion about GAAP not having guidance I think is really a short cut for a request for an exception to GAAP that allows a certain category of items that don’t meet the definition of a security and are not tangible – so certain intangible assets to be accounted for at fair value – and I think for very good reasons we’re getting that request,” he said.

There was a hint that not all agree that the topic is prevalent in the accounting world, though all on the board agreed to the project.

Specifically, board member Gary Buesser, also an analyst, pointed out that the disclosure aspect of rules on digital assets would be the most important for investors over recognition and measurement rules “if and when digital assets become a pervasive issue on companies’ balance sheet.”

“But I don’t think we’re there, a few companies yes, most companies no,” he said.

Commodities won't be included

In a related discussion, the board also voted against including accounting for commodities at this point in time under the project, believing it would complicate and slowdown the efforts on digital assets.

Jones, however, under his purview as chair kept the project on the board’s research agenda but on pause until the work on digital assets is concluded.

“I think commodities are kind of the neglected stepchild in the accounting here. We see this issue, I think there was originally a model that might be a pre-1960 accounting standard that recognized that there were certain unique commodities that maybe a fair value or net realizable value treatment made sense,” said Jones. “I think there’s probably been some tortured application of the broker dealer guide to get things at fair value today versus just dealing with it from an accounting perspective,” he said. But “putting it in this project would be complicated and it would slow the project, which is something that I don't want to do.”

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