Crypto Sector Slow to Adopt New Accounting Rules Despite Years of Advocacy

Despite years of pressing the FASB to develop a standard, the crypto sector has not been scrambling to adopt new accounting rules aimed at better reflecting the swings of Bitcoin and other tokens in their financial statements.

Last year, the FASB issued new provisions that allow for fair value adjustments, providing a more accurate representation of a company’s digital asset holdings. However, practitioners on July 22, 2024, warn that early adoption has been slow due to various factors, including the timing of asset purchases and the companies’ infrastructure for handling the new reporting requirements.

Companies should consider adopting the guidance now, said Aaron Jacob, Head of Accounting at TaxBit, a leading provider of innovative accounting and tax solutions for digital assets. “If you’re tired of the pain points around the old accounting guidance and you know fair value treatment is going to be a better reflection of your activities, which is the case for everyone, then you’re incentivized to adopt the guidance early,” Jacob said.

Jacob cautioned against firms waiting for the actual effective date to start implementing the changes, stressing that would likely result in a painful experience. “And it could increase the risk of doing something incorrectly,” he said. “For example, do you understand the new disclosure requirements? Do you have the data to provide those new disclosure requirements? Have you discussed these with your auditors?”

Adoption Strategies and Considerations

Jennifer Law, Chief Operating Officer at K2 Integrity, a financial crimes, risk, and regulatory advisory firm, echoed similar sentiments. Early adoption is the best approach for companies with significant cryptocurrency holdings and investment companies, but timing is crucial, Law said. “Whether or not companies implement it will depend on their individual circumstances,” she noted. “Some may not be ready due to a lack of infrastructure to handle the reporting.”

Law recommended that companies prepare for the new disclosures by creating a pro forma statement based on their current financial statements. “It makes sense to review their current financial statements, including previous disclosures, and then create a pro forma statement in Q3 to see what’s involved and how it will impact their disclosures,” she advised.

The importance of compliance cannot be overstated, as the SEC remains strict about adherence to the FASB’s guidance, practitioners said. Companies like MicroStrategy, for example, which previously used non-GAAP measures to reflect Bitcoin value, had to adjust their reporting two years ago to align with SEC expectations.

Digital Asset Accounting Evolves

In response to the growing challenges of accounting for digital assets, the FASB took swift action last year, issuing Accounting Standards Update (ASU) No. 2023-08. This move came after the board received hundreds of letters highlighting the need for change, particularly when it came to Bitcoin and its impact on companies’ financial statements.

Many argued that for too long, outdated accounting rules failed to accurately reflect the economic realities of digital asset activities, resulting in significant discrepancies in financial reporting.

The new standard seeks to rectify this by introducing a fair value measurement approach, where companies must measure crypto assets at their current value each reporting period. This shift enables investors and analysts to make more informed decisions, as changes in fair value are now recognized in net income, practitioners said.

The standard also brings welcome relief by reducing the cost and complexity associated with cost-less-impairment accounting. Furthermore, it increases transparency and accountability by mandating disclosures about significant holdings, contractual sale restrictions, and changes during the reporting period. This consistent framework for accounting and disclosure enables investors and analysts to compare entities that hold crypto assets more effectively, fostering a more informed and efficient market.

The new rules will come into effect for fiscal periods starting after December 15, 2024, with early adoption is permitted.