US Crypto Accounting Plan Aims to Capture Bitcoin Volatility (1)
Companies going all-in on cryptocurrency — or even just dabbling in it — will get long-awaited accounting rules under a proposal presented Thursday by U.S. accounting standard setters.
The plan encourages companies that hold cryptocurrencies to report them at fair value, a measurement that aims to capture the most up-to-date value of assets such as Bitcoin and Ether. Changes in value will be reported in a company’s net income, allowing earnings to fluctuate depending on how much crypto the business has. The Financial Accounting Standards Board proposal eliminates the current practice, which effectively only allows companies to record losses in their crypto holdings, never gains if the price reverses.
“It will make things so much easier,” said Mark Eckerle, senior manager at WithumSmith+Brown PC, who is the firm’s digital assets team leader. “It will be a better indicator of a company’s performance and where they actually stand with their assets on the balance sheet at fair value.”
FASB’s proposal is narrow – on purpose. Tokens a company creates for use within its own platform, such as the self-created tokens collapsed crypto exchange FTX offered to customers to make discounted trades on the FTX platform, are specifically excluded. It’s to ensure that companies don’t create tokens just to inflate their balance sheets.
Under the FASB’s plan, assets created or located on distributed ledgers based on blockchain technology and secured through cryptography would be covered by the potential new rules. They must meet the definition of an intangible asset, as defined in US GAAP.
They must also be fungible, meaning that they can be exchanged for other assets of the same type. Non-fungible tokens, or NFTs – unique digital tokens ranging from video clips to sports memorabilia – are excluded from the proposal. Stablecoins are not expected to meet the criteria to use the proposed ledger, nor are wrapped tokens, which are digital tokens that allow crypto from one blockchain to be used on another.
“They had to start somewhere,” said Amal Shehata, an accounting professor at New York University’s Stern School of Business. “This seemed to be the most pervasive and longest in their own journey and development, unlike NFTs and stablecoins; they’re still a little more nascent.”
Lack of rules
No part of the U.S. accounting rulebook specifies how companies such as enterprise software maker MicroStrategy Inc., automaker Tesla Inc. or crypto exchange Coinbase Global Inc. need to recognize and measure the digital currencies they keep in their company coffers.
Companies default to an American Institute of CPA’s practice guidance that treats most cryptocurrencies as intangible assets, a category that includes things like trademarks, copyrights and brands—items that, unlike crypto, are rarely traded. The result: Companies have recorded crypto holdings at the historical price they paid and assess their holdings every quarter for impairment or impairment. If the crypto they bought is Bitcoin, and the Bitcoin price falls even briefly during the period, it is considered weakened. Companies have not been allowed to revise values up if the market picks up again.
“The balance is not 100% accurate based on where you actually are in the market now,” said Jeff Rundlet, head of accounting strategy at accounting software company Cryptio. “And companies spend a lot of money and time on impairment.”
Two crypto mining companies – Marathon Digital Inc. and Riot Platforms Inc. – recently announced accounting changes after miscalculating their Bitcoin write-downs. The companies erred in the method they used to determine whether value had fallen, they reported.
Since 2017, the FASB has rejected three calls to write official rules for crypto, arguing that few companies held significant holdings of crypto and of those that did, many accepted digital currency as customer payments but immediately converted it to cash. The conversation changed when big companies like Tesla and MicroStrategy started investing in Bitcoin.
Details
Companies are already required to present intangible assets as a line item on the balance sheet. According to FASB’s proposal, companies will have to make a separate entry for their crypto assets so that investors and other readers of financial statements get a clear picture of how much a company is invested in crypto.
Because crypto holdings will be measured at fair value, companies will need to provide all of the disclosure requirements outlined in the FASB’s fair value measurement standard, ASC 820, about how they measure their holdings.
The proposal requires additional information about significant holdings of crypto, any restrictions on the holding and any changes in the holding.
The requirements will apply to both public and private companies, the FASB said.
Comments are due on June 6.
