The final guidance is part of its Accounting for and Disclosure of Crypto Assets project, formerly named Accounting for and Disclosure of Digital Assets (emphasis added). FASB’s project began mid-2022 and sought to provide guidance on the disclosure and valuation of digital assets.
Which Digital Assets Are Impacted?
The Board issued its initial project scope in August 2022 with FASB Memo No. 4, in which it defined which digital assets would be impacted. According to the criteria, the assets must
- meet the definition of intangible asset
- not provide enforceable rights to underlying goods, services, or other assets
- be created or reside on a distributed ledger/blockchain
- be secured through cryptography
- be fungible.
This interesting definition highlights those assets that are excluded from the project: non-fungible tokens (NFTs), decentralized autonomous organization (DAO) tokens, and many utility tokens that convey rights to some service. ERC20 or ERC20-like tokens and Bitcoin, commonly understood as cryptocurrencies, are all in scope.
Fair Value: Entities Must Report Increases and Decreases
The second and perhaps most interesting advisory came in October 2022 with FASB Memo No. 6, which provided guidance for asset measurement, or plainly, market valuation. Companies must use fair value accounting for their crypto assets, and the reporting entities must report increases and decreases during each reporting period.
Interestingly, the Board does not provide guidance for assets trading with inactive markets nor guidance for the application of fair value measurement.
What Entities Must Report
The Board issued two additional memos regarding disclosure and presentation in December 2022.
FASB Memo No. 7 stated the straightforward requirements of reporting the preset amount of crypto assets in aggregate and the present gains and losses on those crypto assets. Crypto assets received as payment for goods or services and immediately converted into cash, typically through a payment processor, will be reported as cash flow. This practice simplifies reporting requirements for entities using crypto assets as payments but not retaining them long-term.
FASB Memo No. 8 clearly detailed three requirements for reporting crypto assets as disclosure, activity reconciliation, and restricted asset notes. The reporting elements for significant crypto asset holdings include name of asset, fair value, units held, and cost basis. These items are to be reported during annual and interim periods or each reporting period. The activity reconciliation, or roll-forward, is to report additions, dispositions, and gains/losses during the period. Further, for disposed crypto assets, the difference between the sale price and cost basis must be reported for those disposed assets.
Entities must report:
- Restricted crypto assets and their fair value
- Nature of the duration of the restriction
- Circumstances that could cause a lapse in that restriction.
The memo provided no guidance or definition of a restricted crypto asset, but one can assume staked crypto assets would meet the criteria.
The reporting requirements apply to all public and private entities.
New Rules, New Risks for Directors and Officers
The new requirements present a significant new risk for directors and officers. If your company isn’t writing the value of these assets per FASB rules, you could be underreporting the value of your books, which could deflate stock price. That, of course, opens directors and officers up to lawsuits for misrepresentation of the company’s value.
Accounting staff will be required to identify, value, and disclose—in a prescribed manner—specific cryptocurrency assets. Those assets must be functional currencies and must not convey enforceable rights (e.g., the right to vote during shareholder votes). That definition excludes DAO tokens due to their administrative rights, but what about other fungible assets? Wrapped tokens, while viewed as quasi-promissory notes, may not meet the defined requirements of having no enforceable rights.
The same exclusion may hold true for tokens deemed securities by the Securities and Exchange Commission. Reliable valuation methods are problematic for crypto assets without active trading markets. Improper valuation methods may contribute to reporting deficiencies. Additionally, the large swings in valuations that cryptocurrencies have experienced in the past could wreak havoc on balance sheets and income statements.
How to Prepare for FASB’s Rule Changes
FASB has yet to announce the final vote. Interested observers should continue monitoring the Board’s project memoranda, as the proposed rules above may change prior to the final vote.
Entities with significant crypto asset holdings should consult a knowledgeable accounting firm before preparing their financial reports. Public entities should engage a reputable auditor when considering the new accounting rules to maintain compliance and avoid reporting errors.
