If a new accounting standard for crypto assets is approved, companies would have to reveal more information about their holdings of cryptocurrencies. But they would also get net income boosts when crypto assets rise in value.
The Financial Standards Board (FASB) published a proposed accounting standard update (ASU) on March 23 that would require companies to measure some crypto assets at fair value and record the changes in net income.
The ASU, or exposure draft, Intangibles — Goodwill and Other — Crypto Assets: Accounting for and Disclosure of Crypto Assets, also requires companies to disclose more information about their significant holdings of cryptocurrencies, including any restrictions on and changes in those holdings.
In moving away from early guidance classifying crypto assets as indefinite-lived intangible assets and having companies hold them at cost less any impairments, FASB was looking to (1) provide investors with decision-useful information; and (2) have the accounting approach reflect the underlying economics of digital assets.
The new accounting rules allow for companies to record unrealized gains on highly liquid digital assets in their financial statements when the appreciation occurs as opposed to waiting for a disposition. — Justin Wilcox, FML
Under the new guidance, crypto assets would have to be presented separately from other intangible assets on the balance sheet, as would any changes in fair value. The ASU applies to both public and private companies.
“The new accounting rules allow for companies to record unrealized gains on highly liquid digital assets in their financial statements when the appreciation occurs as opposed to waiting for a disposition,” said Justin Wilcox, a partner at accounting firm FML and leader of its cryptocurrency practice. “The current approach required financial statements to reflect only the decreases in value via impairment, which was totally impractical for this asset class.”
Wilcox also noted companies will still get the benefit of a realized gain or loss method for tax purposes. “So there is opportunity to show upside to the P&L without having cash tax outflow,” he said.
Narrow Scope
The new accounting guidance would not apply to all digital assets or all cryptocurrencies. Among other requirements, the asset has to be fungible, reside on a blockchain ledger, and not provide the asset holder any claims on underlying goods, services, or other assets.
Non-fungible tokens (NFT) and stablecoins do not qualify for the accounting treatment, according to FASB.
In the “basis for conclusions” section of the ASU, FASB acknowledged that, considering the wide range of digital assets, the scope of the new guidance was narrow but “appropriately defined.”
Accounting for and Disclosure of Crypto Assets would also not cover self-issued tokens or those issues by related parties, which played a role in the financial meltdowns and subsequent bankruptcies of cryptocurrency exchange FTX and crypto lending platform Celsius last year.
We do not believe it is feasible for FASB to set a rule or standard on what constitutes a reliable source for fair value [of tokens like FTT], but we believe this risk can be mitigated in the future in part by requiring consistent disclosures.” — David Gonzales and Alastair Drake, Moody’s
FTX, for example, held large amounts of its self-issued token FTT, which had a small circulation but was valued by the company in the billions of dollars.
If the accounting guidance on fair value covered crypto assets like FTT, “it could lead investors to misplaced confidence in a value that is supported by a related-party exchange but is highly illiquid and has few relative (third-party) transactions,” wrote David Gonzales and Alastair Drake, accounting analysts at Moody’s Investors, last November.
“We do not believe it is feasible for FASB to set a rule or standard on what constitutes a reliable source for fair value [of such tokens],” wrote the Moody’s analysts, “but we believe this risk can be mitigated in the future in part by requiring consistent disclosures.” Among the disclosures they suggest would be detailed information about the source of the fair value amounts.
Calculating Values
For digital assets that do qualify for the ASU, FASB did not provide specifics on how their value should be calculated. Instead, members said Topic 820 (Fair Value Measurement) contained sufficient guidance.
In the run-up to the release of the proposed ASU, some experts noted that given the difficulty of valuing assets that don’t trade on a centralized exchange, like Bitcoin, FASB needed to specify the fair value basis for crypto assets more clearly so that investors could compare companies’ books.
It is uncertain as to whether Accounting for Crypto Assets leads more companies to put some of their excess cash into cryptocurrencies, as some in the industry have hoped.
However, “simplicity in accounting translates into fewer barriers to entry for companies looking to dive in as well as a more straightforward and efficient way for CFOs and financial statement auditors to account for the emerging tech,” said Wilcox.
Comments on the proposed ASU are due by June 6.