The new standard aims to improve accounting treatment of certain digital assets under GAAP and may pave the way for increased institutional adoption.

On September 6, 2023, the Financial Accounting Standards Board (FASB)[1] voted to approve Accounting for and Disclosure of Crypto Assets, an Accounting Standards Update (ASU) to FASB Accounting Standards Codification (ASC) Topic 350 (Intangibles—Goodwill and Other), originally proposed in March 2023. The ASU will standardize the treatment of certain digital assets under US generally accepted accounting principles (GAAP) (the Update).

According to FASB, market feedback indicated concern with the current accounting methodology for crypto assets under ASC 350 as indefinite-lived intangible assets (whereby assets must be calculated at a historical cost less impairment, such as for trademarks). The methodology reflects “only the decreases, but not the increases, in the value of crypto assets in the financial statements until they are sold,” and therefore “does not provide investors . . . with decision-useful information . . . that reflects (1) the underlying economics of those assets and (2) an entity’s financial position.”

To address FASB’s concern, the Update now requires an entity to measure crypto assets at fair value[2] each reporting period with changes in fair value recognized in net income.

The Update also mandates enhanced disclosure requirements concerning an entity’s crypto asset holdings, intended to improve information available to investors.

Scope of the Proposal

The Update applies to all entities (i.e., public, private, not-for-profit; employee benefit plans; and across all industries) that prepare financial statements applying US GAAP and that hold crypto assets, if those crypto assets meet the following six criteria:

1. They must meet the US GAAP definition of intangible asset
2. They must not give the asset holder an enforceable right or claim to a good, service, or another asset
3. They must be created or reside on a distributed ledger based on blockchain technology
4. They must be cryptographically secured
5. They must be fungible
6. They must not be created or issued by the reporting entity or its related parties

Pursuant to these criteria, it appears likely that the most actively traded crypto assets, such as Bitcoin and Ether, will be in scope. However, non-fungible tokens (NFTs) and possibly stablecoins and governance tokens appear not to fall within the Update. Wrapped tokens may also not fall within the Update if they provide the holder with a right or a claim on another asset. These may need to be accounted for separately, using either the indefinite-lived intangible assets model or another accounting model.

Effect of the Update

Current GAAP dictates that crypto assets are accounted for as indefinite-lived intangible assets, and generally tested for impairment annually. Under the current rules, an entity holding crypto assets may assess whether to mark down the value of the holdings to the “lowest fair value observable”[3] during the reporting period. This may cause the entity to record an impairment expense, which reduces the carrying amount of the holdings on the balance sheet, which in turn reduces net income on the income statement. The value of the holdings on the entity’s balance sheet also remains at the lowest observed value, regardless of any increase in fair market value.

Under the Update, in-scope crypto asset holdings will be measured at fair value under ASC Topic 820 (Fair Value Measurement) each reporting period with gains and losses recognized in the period as a component of net income.

Presentation

Companies applying the new Update will likely present in-scope crypto assets on the entity’s balance sheet separate from other intangible assets because they have different measurement requirements (fair value versus historical cost less amortization and impairment). Separate presentation may also be viewed as improving transparency of crypto asset holdings on the financial statements. Entities will also be required to classify the cash receipts from the nearly immediate sale of crypto assets that were “received as noncash consideration in the ordinary course of business (for example, in exchange for the transfer of goods and services to a customer) . . . as cash flows from operating activities.”

Disclosures

The Update will require that entities holding in-scope crypto assets disclose certain “decision-useful information” in financial statements to investors, including:

• The disclosures required by ASC 820 (fair value);
• The name, cost basis, fair value, and number of units of each significant[4] crypto asset held in both interim and annual financial statements;
• How the cost basis for each significant crypto holding is determined, on an annual basis;
• A rollforward of the entity’s crypto asset holdings in the aggregate, showing additions (with a description of the activities that resulted in the additions), dispositions, gains, and losses;
• For any dispositions of crypto assets in the reporting period, cumulative realized gains and losses, and a description of the activities that resulted in the dispositions; and
• The fair value of any crypto assets subject to restriction, the nature and remaining duration of the restriction(s) and the circumstances that could cause the restriction(s) to lapse.

Conclusion

According to FASB, the Update better reflects the underlying economics of crypto asset transactions on the balance sheet. As many enterprises look at crypto assets to facilitate services, transactions, operations, and even to diversify corporate treasury holdings, the Update may make institutional adoption of crypto assets more attractive to entities that have yet to engage meaningfully with crypto as an asset class. Given that accounting standards prior to the Update may have discouraged companies from holding Bitcoin or Ether on their balance sheets, the Update’s shift to more frequent fair value reporting, along with the transparency it affords investors, may be a win-win for all market participants.

A formal ASU is expected to be published by the end of 2023. The Update is expected to become effective for 2025 annual reports for calendar-year public and private companies. However, it is expected that early adoption of the Update’s provisions would be permitted in any interim or annual period after the issuance of the final ASU.

Endnotes

[1] FASB describes itself as “the independent, private-sector, not-for-profit organization…that establishes financial accounting and reporting standards for public and private companies and not-for-profit organizations that follow Generally Accepted Accounting Principles (GAAP)… [and] is recognized by the U.S. Securities and Exchange Commission as the designated accounting standard setter for public companies.” See https://www.fasb.org/facts.

[2] Defined as “[t]he price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

[3] https://www.fasb.org/document/blob?fileName=BMHO20220511.pdf

[4] In the Background Information and Basis for Conclusions appended to the Rule, FASB noted that it declined to define “significant” in any concrete way: “[T]he Board decided to allow entities to use appropriate judgment to determine their significant holdings. Using the term significant holdings is consistent with other GAAP requirements and is not further defined in the amendments in this proposed Update.”