The cryptocurrency and digital assets community has been long awaiting accounting standards in the U.S. to provide clarity on the treatment of these assets. The Financial Accounting Standards Board (FASB) met on October 12, 2022, and tentatively concluded that all entities will be required to report crypto assets at fair value on their financial statements.
The FASB added the topic of accounting and disclosure of crypto assets to its technical agenda in December 2021, after feedback from the community through an invitation to comment process. Earlier in March 2022, the U.S. Securities and Exchange Commission (SEC) also released Staff Accounting Bulleting (SAB) No. 121, which explains that companies subject to certain SEC reporting and who custody crypto assets for customers are required to present a safeguarding liability and a related crypto asset on their balance sheet at fair value.
The decision by the FASB is a significant move forward for an industry that often felt fair value was the best reflection of crypto assets for financial reporting. Until now, many entities had recognized crypto assets as indefinite-lived intangible assets, which are required to be recognized at cost, less any subsequent impairments, under U.S. generally accepted accounting principles (U.S. GAAP). Intangible assets are currently allowed to be revalued to fair value under International Financial Reporting Standards (IFRS).
Also included in the FASB’s tentative conclusions are:
- Fair value will be based on the guidance in Topic 820, Fair Value Measurement.
- Gains and losses from changes in fair value will be recognized within comprehensive income.
- Costs to acquire crypto assets (i.e., trading fees and commissions) should be recognized as an expense, unless certain industry-specific guidance specifies otherwise.
- Earlier in August 2022, the FASB tentatively decided on the scope of the new guidance. Non-fungible tokens (NFTs) and stablecoins are likely to initially be excluded from the scope of this new guidance. The criteria to be scoped into the guidance is as follows:
- Meet the definition of an intangible asset
- Does not provide the asset holder with enforceable rights to, or claims on, underlying goods, services or other assets
- Created or reside on a distributed ledger or “blockchain”
- Secured by cryptography
- Are fungible
The FASB decided to not create any measurement alternatives for crypto assets with inactive markets or more specific implementation guidance on applying fair value principles to crypto assets. It also considered whether the guidance should only be applicable to certain entities, but concluded any guidance should apply to all entities.
Next steps will include a new Accounting Standards Update to be issued by the FASB to formalize the new guidance. The FASB is still evaluating decisions on presentation, disclosure and transition related to crypto asset guidance, which will be evaluated at future meetings. We should expect more guidance in the coming months.
The accounting method considerations may have tax implications, including but not limited to accounting method change for income tax purposes. For questions about the potential impact of these changes on you or your company, including tax implications, please contact us or speak with your BPM Blockchain and Digital Assets professional.
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