Add more transparency around liquidity, custodians of cryptoassets, FASB advisors say

Although proposed FASB rules on cryptoassets will improve financial reporting, more transparency should be required around liquidity and third-party custodians of the assets as concerns have bubbled up, analysts on a board advisory panel said.

A key concern is the ability of an entity to convert tokens into cash quickly when needed and also around counterparty risk, according to the board’s Investor Advisory Committee (IAC) discussions on May 11, 2023.

“Recently, there’s been some concern about the custody of these assets as it relates to counterparty risk so any improved transparency around risks that might be related to a third party housing the custody of those assets would be helpful,” Minesh Patel, senior director and sector lead – US Leveraged Finance at S&P Global Ratings, said.

The issue of crypto custody relates to the process of safeguarding the asset from theft.

“I agree that the custody of the asset is very important because there’s a lot of unaudited offshore unregulated entities that play in the space so we would want to know as an investor where are you holding this asset,” Ronald Graziano, managing director, Global Accounting & Tax Research at Credit Suisse Group, said.

The IAC is a 10-member standing committee that was established in 2007 to work in an advisory capacity with the FASB to ensure that investor perspectives are effectively communicated to the board on a timely basis in connection with the development of U.S. Generally Accepted Accounting Principles (GAAP).

The discussion was in relation to a FASB proposal on cryptoassets to require fungible tokens to be measured at fair value.

Today, cryptoassets are accounted for as intangible assets and measured at historical cost less impairment. As such if the fair value recovers, entities are unable to write the asset back up, which does not reflect the economics of the cryptoassets being held. Some entities do value their cryptoassets at fair value if they followed specialized guidance like investment companies and broker dealers.

Patel and Graziano also said they favor the FASB’s proposed changes to require that cryptoassets be measured at fair value, viewing it to be an improvement over the old “impairment model” where a company is only able to mark down the asset.

“This will fix that issue - we can mark it up, get consistent disclosure, better information in the balance sheet,” Graziano said. “However, a critique of the rule would be because of the volatility of these assets on running the unrealized gains and losses through net income, it won’t be useful to myself and I would think most investors will treat that as a non-GAAP adjustment and just reverse it,” he said.

Graziano suggested that an alternative could be to leave those unrealized gains and losses in equity with those that are realized “given that this asset is really not an operating asset it’s more of an investment.” The “majority of it is going to be held long term and again the volatility can create a lot of noise in the income statement,” he explained.

Snapshot of proposed rules

In March, the FASB issued Proposed Accounting Standards Update (ASU) No. 2023-ED200, Intangibles—Goodwill and Other—Cryptoassets (Subtopic 350-60): Accounting for and Disclosure of Cryptoassets, which will require cryptoassets that meet six specific conditions to be measured at fair value and changes in value recognized in each reporting period as profit or loss. Fair value represents the price that would be received if the company were to sell the cryptoasset in an orderly transaction to a willing and knowledgeable buyer.

Companies would present cryptoassets separately from other intangible assets on the balance sheet. Disclosures must be made about significant crypto holdings, restrictions, and changes in those holdings.

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