A new cryptocurrency accounting and disclosure standard will be scoped narrowly to address a subset of fungible “intangible assets” that reside on a blockchain or distributed ledger, the FASB unanimously decided on Aug. 31, 2022.
The guidance would also focus on cryptocurrencies that are secured through cryptography and do not meet the definition of a contract, the board agreed.
Forthcoming guidance, which will be discussed at a future meeting, would fall under Topic 350, Intangibles—Goodwill and Other, where the accounting and economics are off.
“We may not necessarily conclude all the measurement [guidance] should be the same for everything in the scope – we may have subsets and we’re going to have to have some other measurements,” FASB Chair Richard Jones said. “I think it’s possible ‘intangible asset’ measurement may be appropriate for some subset for what’s now in our scope. So I think the intangible asset location is the correct location and definitely support that.”
The rules would not address securities and fiat currencies or non-fungible tokens (NFTs), according to the discussions.
“It excludes crypto assets where the current accounting really isn’t problematic and I think that includes those that are deemed securities and also NFTs,” FASB member Fred Cannon said. “I also support the staff’s exclusion of the three criteria that define money broadly and that is ‘medium of exchange, store of wealth, and unit of account,’” he said. “Despite the current term ‘cryptocurrencies,’ these cryptocurrencies are not broadly pervasively used as money today, so therefore I think it best to exclude that. In addition, we’re not being asked to look at these as currencies.”
The guidance will be drawn for both public and private companies and for not-for-profit organizations, leveraging current rules.
In light of the scope, board members also suggested that the project be renamed from “accounting for and disclosure of digital assets” to another name that reflects the subset of cryptocurrencies.
“Digital assets include things like software - depending on what you think a digital asset is, it includes motion pictures, gift cards, all kinds of things that are tracked digitally,” FASB Vice Chair James Kroeker said. “So I think if we have a section that says ‘this is the accounting for digital assets,’ it has a lot of potential to confuse.”
The project was added to the FASB’s technical agenda in May after the board heard that current accounting rules do not necessarily reflect the underlying economics of crypto assets. Cryptos such as Bitcoin and Ethereum, are today accounted for as intangible assets and reported on the balance sheet at historical cost. Those assets are deemed to be impaired when the price drastically drops but that loss cannot be recovered in financial reports when the price rebounds.
The decision to leverage the definition of intangible asset would enable the board to address the types of cryptocurrencies “for which stakeholders are seeking accounting improvements,” according to the discussions.
Another advantage is that by requiring that these assets meet the definition of an intangible asset, the board could leverage aspects of the existing accounting framework in Topic 350, including the existing derecognition guidance for nonfinancial assets within that topic.
The board also agreed with differentiating the characteristics of crypto assets - i.e., that they are created or reside on a blockchain and are secured through cryptography. Providing those characteristics to the scope criteria would exclude items like software, media, or data from being pulled into the scope of the project.
Moreover, appropriately including a technological form is also important because while it is impossible to predict the future of these assets, it allows for flexibility if the technology continues to evolve.
In relation to the criterion that a crypto not be defined as a contract as in the GAAP Master Glossary, board members said it was important to clarify that they were not talking about the underlying multi-party protocols that exist underlying the asset. Though those could be called a contract by some, that is not what the scope entailed, the discussions indicated.
Furthermore, in relation to the assets being fungible, the board took note that financial statement users have said that they do not observe entities holding material amounts of nonfungible digital assets. “I believe if they were to observe such holdings, the reported value would not affect their analysis because of the uncertainty surrounding the value,” a staff member told the board.
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