The FASB on Sept. 6, 2023, unanimously voted to finalize proposed accounting rules on crypto assets—one of the board’s quickest decisions recently on a significant topic, coming just five months after issuance for public comment.
Already, the decisions are being touted as a win by the crypto sector which pressed for the rules for years. A final standard will be published in this year’s fourth quarter.
The guidance will enable crypto assets like bitcoin to be accounted for at fair value, with any changes in fair value flowing through earnings. This is a major change from what can be done now, according to the discussions.
“I think in my brief term here, there hasn’t been an issue that’s excited such passion from people about something and it probably wasn’t the accounting it was really the underlying ‘something’ for those who thought it was the best thing coming and others who had a contrary view,” FASB Chair Richard Jones said. “But at the end of the day that’s not our mission – our mission is ‘to best reflect the economics of the transaction to provide investors and allocators of capital with the information we need,’” he said. “I think this moves the needle there; I think we heard overwhelmingly from investors that allocate capital based on the use of financial statements that this will provide them better information to make their decisions.”
The board largely affirmed the proposed income statement, balance sheet, and cash flow presentation requirements. Also affirmed were the proposed disclosures for all entities, including those on detailing significant holdings, contractual sale restrictions, and reconciliation disclosure, with a slight change to the reconciliation disclosure.
The standard will take effect for fiscal years beginning after Dec. 15, 2024, including interim periods within those years, for all entities—public and private companies and not-for-profit organizations, according to the discussions. Early adoption is allowed.
The guidance must be applied using a cumulative effect adjustment to the opening balance of retained earnings - or other appropriate components of equity or net assets - as of the beginning of the annual period in which a company adopts the rules.
The standard was developed in response to concerns that current accounting rules do not reflect the underlying economics of crypto assets which are volatile and can bounce up and down in value depending on market pressures. Tokens today must be accounted for as intangible assets and reported on the balance sheet at historical cost. Thus, when the price drastically drops and those assets are deemed impaired that loss cannot be recovered in financial reports when the price rebounds.
Overall, the full board affirmed that the scope of proposed Accounting Standards Update, Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets, must address crypto assets that meet six criteria: 1) fungible; 2) deemed to be intangible; 3) do not provide the asset holder with enforceable rights to, or claims on, underlying goods, services, or other assets; 4) are created or reside on a distributed ledger based on blockchain technology; 5) secured through cryptography; and 6) not created or issued by the reporting entity or its related parties.
Board members noted – and said it should also be stated in the “Basis for Conclusions” section of the new standard that the term “enforceable rights” in the third criterion on the list does not mean that a company needs to get a legal opinion to apply the guidance.
Other specific main issues affirmed are that: an entity must measure crypto assets in scope at fair value in accordance with Topic 820, Fair Value Measurement, regardless of whether those crypto assets have quoted prices in active markets; that costs to acquire crypto assets must be expensed as incurred; and that crypto assets must be separately presented in the income statement.
FASB members stressed that investors would find overall package of the resulting information useful.
“The benefits are clear for investors,” FASB member Joyce Joseph said. “Quite importantly, they will have the fair value measurement information, new disclosures that could better enable their decision making, they will have a clearer view into the financial position and financial performance of those companies that are transacting with crypto assets,” she said. “The industry is young and it’s evolving and it’s clear that the staff will continue to monitor circumstances that may lead to new accounting research and this may cause us to now make different decisions in the future and so that monitoring is critical to the development of future accounting standards.”
Similarly, FASB member Susan Cosper said the benefits justify any costs that may be incurred, but added that some may be disappointed that the scope was not broader. “I know that there will be some that are disappointed that we haven’t expanded the scope to address wrapped tokens and [non-fungible tokens] and what not,” she said. “But I think that intentionally keeping this project narrow has really allowed us to get this information in the hands of investors sooner.”
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