Crypto Accounting Plan’s first challenge: What’s in, what’s out

Five years and several hundred requests later, US accounting regulators are ready to start writing rules for digital assets – just as the market is buzzing after a crypto winter.

All cryptocurrencies’ wild fluctuations will be captured by rules considered by the Financial Accounting Standards Board. But most importantly, provided the market recovers, the company’s accounts will reflect declines in cryptocurrencies, not just downturns as under current reporting.

It would be a long-awaited change for the crypto industry, accountants and investors who complain about current practices, where companies that hold cryptocurrencies like Bitcoin or Ether are only allowed to report impairment – never recoveries – unless they sell them.

“It kind of torpedoes the financial presentation and is very disconnected from what’s happening financially,” said Steve Soter, senior director of product marketing at Workiva Inc., about the current accepted accounting for digital assets.

FASB has not yet plotted the path it will take, but the board has talked about measuring cryptocurrency at fair value, the price an asset achieves in a tidy market. To supporters, who sent hundreds of letters to the FASB last year urging it to take action, measuring fair value will capture the true market value of cryptocurrencies.

“Many of the people who asked for fair value believe that it is a better reflection of the economy – up or down,” said Amy Park, partner at Deloitte & Touche LLP.

No part of the US accounting rulebook specifies rules for cryptocurrencies such as Bitcoin and Ether. The American Institute of CPAs filled the gap in 2019 with guidelines that said that companies that are not investment companies should account for their cryptocurrencies as intangible assets. This means that companies register them at historical prices, look for signs of impairment, and mark down the stock if the value decreases. While AICPA guidance does not have the same weight as official rules, companies generally do not deviate from it.

The board expects to discuss the next step as early as next month, a spokesman for the FASB said.

What’s in, what’s out

Three times since 2017, the FASB has rejected calls to draw up official rules for crypto, claiming that only a few companies did more than frolic in the new area. Of the companies that used crypto, many accepted digital currency as customer payments, but immediately converted the currency to cash, the board said every time it received a request to address the issue.

The conversation changed when the electric car manufacturer Tesla Inc. bought Bitcoin worth $ 1.5 billion in 2021 and the corporate software company MicroStrategy Inc. announced that they are investing in Bitcoin as one of their most important business strategies.

The direction of US market regulators also changed. As recently as November 2021, the Securities and Exchange Commission warned Acting Accountant Paul Munter that setting rules for cryptocurrencies would not be an easy problem. In February, he told the FASB that there was room for improvement.

Now the FASB must find out exactly what kind of cryptocurrencies to focus on.

So far, the board focuses only on exchange-traded assets, which means the most common types of cryptocurrencies, such as Bitcoin, which are actively traded and have easily determined prices. Obscure coins held by a few owners? Not covered.

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In the same way, non-fungible tokens, or NFTs – digital art and video clips that are unique in nature and therefore more difficult to value – are not expected to be captured by potential new rules. While the holder of a Bitcoin or Ether can look up the price of the coins at any time, the holder of an individual cartoon image of a Taco Bell taco must dig deep to find out the value. In addition, the FASB is not expected to deal with stack coins, many of which are classified as financial instruments and receive separate accounting treatment.

Putting the scope around what is inside and what is outside will be a challenge, said Scott Muir, partner in KPMG LLP.

“I do not think anyone thinks it will be an easy exercise,” he said.

The FASB may well set some parameters around what is considered an exchange-traded asset and then give examples – as in, perhaps, “‘Here’s how we think about parameters, but for the sake of clarity we mean things like Bitcoin and Ether'”, said Muir .

Regardless of the FASB draft, it must be robust enough to prevent people from inflating the balance because they once sold one obscure coin, FASB leader Richard Jones said at a June meeting of the Private Company Council.

“I can not just invent a coin and convince you to buy one and mark the other million I have on my balance sheet at that price,” Jones said.