FASB Proposes Accounting Rules for Measuring, Presenting and Disclosing Crypto Assets
March 24, 2023
The FASB on March 23, 2023, issued a proposal to provide accounting and disclosure rules for certain types of crypto assets — provisions aimed helping companies to accurately reflect the economics of such assets. If finalized, the proposal will build the first explicit accounting standard on crypto assets in U.S. GAAP.
The rules will apply to both well-known crypto assets that trade in active markets like Bitcoin and Ethereum, as well as other types of crypto assets that do not trade nearly as frequently (or perhaps at all), accountants said.
“The disclosures are significant – the most important of which may be the requirement for details about significant crypto holdings,” KPMG LLP Partner Scott Muir said. “If, for example, I’m a company that holds significant amounts of Bitcoin, Ether, Litecoin I’m going to tell people for each one of those about the number of tokens of each I hold, their fair value and their cost basis,” he said.
The board proposed to require crypto assets that meet six specific conditions 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 crypto asset in an orderly transaction to a willing and knowledgeable buyer.
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, according to the proposal.
The company would also disclose information about significant crypto holdings, restrictions, and changes in those holdings.
The proposal comes at a time of heightened regulatory scrutiny following a series of scandals and bankruptcies in the crypto sector. But despite concerns about regulatory crackdown, over the past few weeks Tokens such as Bitcoin have experienced a bounce from prior lows over banking concerns stemming from recent bank failures.
It is this type of ebb and flow in the trillion-dollar crypto sector that caused practitioners to press the FASB to develop accounting rules, stressing last year that rules that are currently available do not necessarily reflect the underlying economics of crypto assets. Tokens today must be 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, practitioners have told the board.
The board said it is seeking public comment by June 6 on the guidance, which was issued as Proposed Accounting Standards Update (ASU) No. 2023-ED200, Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60) Accounting for and Disclosure of Crypto Assets.
“During the FASB’s recent agenda consultation process, stakeholders from all professional backgrounds identified digital assets as a top priority area for the Board to address,” FASB Chair Richard Jones said in a statement. “We responded to that feedback with the proposed ASU, which would provide investors greater transparency into the fair value of crypto assets held by entities, as well as additional disclosures about the types of crypto assets held and changes in those holdings.”
Rollforward Might Generate Pushback
The proposal is specifically written to address crypto assets that are: fungible; deemed to be intangible; do not provide the asset holder with enforceable rights to, or claims on, underlying goods, services, or other assets; are created or reside on a distributed ledger based on blockchain technology; secured through cryptography; and are not created or issued by the reporting entity or its related parties.
And amid the disclosure provisions, include an annual rollforward of crypto assets, showing purchases, sales, gains and losses on a gross basis—information that might generate the most pushback, practitioners said. “Similar rollforward disclosures have been proposed in the past in other areas and ultimately abandoned over concerns expressed about the cost and effort to prepare them,” Muir said.
Another notable proposed disclosure is that in each interim and annual period, a company would have to disclose restrictions that exist on its crypto assets and what it takes to lift them, he said. “For example, if a company has crypto assets locked up in a staking protocol, it would appear the company should disclose the fair value of those assets, the nature and duration of the restriction imposed on them, and what has to occur for those restrictions to be lifted.”
Relief from a “Cost-Less-Impairment” Model
Accountants said the proposal is welcomed for the relief it will provide from the “cost-less-impairment” model that must be used today, a one-way model that works for certain nonfinancial assets like property, plant, and equipment, where the asset is expected to be used in operations and “consumed” by the owner over a longer period of time – but not for cryptos.
“The cost-less-impairment accounting model provides less relevant information for crypto assets, which are often held for investment or speculative purposes and intended to be liquidated in a shorter time horizon,” Scott Ehrlich, president of Mind the GAAP, LLC, said. “In other words, companies often hold crypto assets for the same intent and purpose as other traditional investments, like money markets, bonds, and equity investments,” he said. “As these other investments are generally measured at fair value under GAAP, it would make sense to value crypto assets the same way.”
To transition the guidance, companies will be required to use 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 as of the beginning of the annual period in which a company adopts the proposal.
Early adoption will be permitted, “including adoption in an interim period as of the beginning of the annual period that includes that interim period.”
[Thomson Reuters]
