On March 23, 2023, the Financial Accounting Standards Board (FASB) issued a proposal to provide accounting and disclosure rules for certain types of cryptocurrency assets. The proposal would help companies more accurately reflect the economics of such assets. If finalized, the proposal will build the first explicit accounting standard on crypto assets in U.S. Generally Accepted Accounting Principles (GAAP).
Scope of changes
Proposed Accounting Standards Update (ASU) No. 2023-ED200, Intangibles — Goodwill and Other — Crypto Assets, Accounting for and Disclosure of Crypto Assets, would apply to well-known crypto assets that trade in active markets, such as Bitcoin and Ethereum. It would also be used for other types of crypto assets that don’t trade nearly as frequently (or perhaps at all).
For example, the proposed disclosures for Bitcoin would include:
· The number of tokens held,
· Their fair value, and
· Their cost basis.
The company would also disclose information about restrictions in crypto holdings, what it would take to lift any restrictions and changes in those holdings.
The proposal is specifically written to address crypto assets that meet the following conditions:
1. They’re fungible,
2. They’re deemed to be intangible (which excludes securities and fiat currencies),
3. They don’t provide the asset holder with enforceable rights to, or claims on, underlying goods, services or other assets (such as with a contract),
4. They’re created or reside on a distributed ledger based on blockchain technology (thereby excluding software, media and data),
5. They’re secured through cryptography, and
6. They 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 proposal. 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.
Fair value measurement
The proposal would require crypto assets that meet those conditions to be measured at fair value, with changes in value recognized in each reporting period as gains or losses in comprehensive income. Fair value represents the price that would be received if the company were to sell the crypto asset in an orderly transaction to a willing and knowledgeable buyer.
Under the proposal, companies would present crypto assets separately from other intangible assets on the balance sheet because they have different measurement requirements. This approach would result in a prominent display of crypto assets, providing investors with clear and transparent information about the fair value of crypto assets within the financial statements.
To implement the guidance, companies would be required to apply a “cumulative effect adjustment, including the direct effects of that adjustment such as tax consequences” to the opening balance of retained earnings or other appropriate components of equity or net assets. This treatment would take effect as of the beginning of the annual period in which a company adopts the proposal.
Need for change
The proposal comes at a time of heightened regulatory scrutiny following a series of scandals and bankruptcies in the crypto sector. However, despite concerns about a regulatory crackdown, Bitcoin and other crypto assets have recently experienced a bounce from prior lows.
This type of ebb and flow 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 drastically drops. But, if the price goes back up, that impairment can never be recovered. Some crypto investors have complained that the current accounting treatment doesn’t accurately reflect the underlying economics for digital assets.
The comment period for the proposal ends on June 6. Many accountants favor relief from the cost-less-impairment model. They claim it doesn’t work for crypto assets that are often held for investment or speculative purposes and intended to be liquidated over the short term. Instead, the current one-way model is generally more appropriate for assets that will be used in operations over the long term, such as property, plant and equipment.