FASB issues draft accounting rules for cryptoassets

If a new accounting standard for cryptoassets is approved, companies will have to disclose more information about their holdings of cryptocurrencies. But they will also get net income increases as crypto assets rise in value.

The Financial Standards Board (FASB) published a proposed accounting standards update (ASU) on March 23 that will require companies to measure some crypto assets at fair value and record the changes in net income.

ASU, or exposure draft, Intangible Assets – 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 to those holdings.

By departing from early guidance to classify cryptoassets as indefinite-lived intangible assets and allow companies to hold them at cost less any impairment, the FASB sought to (1) provide investors with useful decision-making information; and (2) have the accounting approach reflect the underlying economics of digital assets.

The new accounting rules enable companies to register unrealized gains on highly liquid digital assets in the accounts when the increase in value occurs, as opposed to waiting for a disposition. – Justin Wilcox, FML

Under the new guidance, crypto assets will need to be presented separately from other intangible assets on the balance sheet, as will any changes in fair value. The ASU applies to both public and private companies.

“The new accounting rules allow companies to record unrealized gains on highly liquid digital assets in their accounts when the appreciation occurs, as opposed to waiting for a disposition,” said Justin Wilcox, a partner at accounting firm FML and head of its cryptocurrency practice. . “The current approach required the accounts to only reflect the decline in value via impairment, which was totally impractical for this asset class.”

Wilcox also noted that companies will still get the benefit of a realized gain or loss method for tax purposes. “So there’s an opportunity to show page to the P&L without having cash tax output,” he said.

Narrow scope

The new accounting guidance will not apply to all digital assets or all cryptocurrencies. Among other requirements, the asset must be fungible, be on a blockchain ledger and not give the asset holder a claim to underlying goods, services or other assets.

Non-fungible tokens (NFT) and stablecoins do not qualify for the accounting treatment, according to the FASB.

In the “basis for conclusions” section of the ASU, the FASB acknowledged that, given the broad spectrum of digital assets, the scope of the new guidance was narrow but “appropriately defined.”

Accounting for and Disclosure of Crypto Assets nor will it cover self-issued tokens or those related-party issues, which played a role in the financial collapses and subsequent bankruptcies of cryptocurrency exchange FTX and crypto-lending platform Celsius last year.

We do not believe it is possible for the FASB to set a rule or standard for what constitutes a reliable source of fair value [of tokens like FTT]but we believe that this risk can be partially mitigated in the future by requiring consistent disclosures.” —David Gonzales and Alastair Drake, Moody’s

FTX, for example, had 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 fair value accounting guidance covered crypto-assets like FTT, “it could lead investors to misplace confidence in a security that is backed by a closely held 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 possible for the FASB to set a rule or standard for what constitutes a reliable source of fair value [of such tokens]”, the Moody’s analysts wrote, “but we believe that this risk can be partially mitigated in the future by requiring consistent disclosures.” Among the disclosures they propose will be detailed information about the source of the fair value amounts.

Calculation of values

For digital assets that qualify for the ASU, the FASB did not provide details on how the value should be calculated. Instead, members said that Topic 820 (Measurement of Fair Value) contained sufficient guidance.

Ahead of the release of the proposed ASU, some experts noted that given the difficulties in valuing assets that are not traded on a centralized exchange, such as Bitcoin, the FASB needed to specify the fair value basis for crypto assets more clearly. that investors could compare companies’ books.

It is uncertain whether Accounting for crypto assets leading to more companies putting 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 simpler and more efficient way for CFOs and CFOs to account for the new technology,” Wilcox said.

Comments on the proposed ASU are due by June 6.