The FASB should develop an accounting framework to address cryptocurrencies because the value of such assets are not being properly reflected on balance sheets, the International Swaps and Derivatives Association’s (ISDA) Accounting Committee said.
The board should craft rules to allow all entities, not just investment companies and broker dealers, to account for crypto assets at fair value, ISDA’s committee told the board in a June 7, 2021 letter.
“A more appropriate accounting model for highly liquid crypto assets that would meet the definition of readily convertible to cash, similar to the derivative definition would be to allow the fair value option,” Committee Chair Jeannine Hyman, and Director Antonio Corbi, wrote. “Since derivatives, an instrument that is readily convertible to cash and tied to an underlying, is accounted for at fair value, we believe similar instruments such as crypto assets should be permitted as well.”
Crypto assets generally do not meet the definitions of cash, inventory, or financial asset, as there is no right to receive cash or another financial instrument from a second entity, the letter states. However most cryptocurrencies, including the most common, Bitcoin and Ethereum, currently meet the definition of an intangible asset and are accounted for under Topic 350, Intangibles—Goodwill and Other. Accountants refer to the AICPA Practice Aid, Accounting for and Auditing of Digital Assets, when determining the appropriate accounting treatment of digital assets.
The Practice Aid states that cryptocurrencies—a subset of digital assets–would meet the definition of intangible assets and would generally be accounted for under Topic 350, and asserted that cryptocurrencies did not meet the definitions for cash or cash equivalents, financial instruments or financial assets, or inventory.
Under both the Practice Aid and Topic 350, digital assets would be initially measured at cost, then tested for impairment. However, if the reporting entity is within the specialized guidance for investment companies or broker dealers, the assets would be accounted for at fair value.
“Accounting for crypto assets as an intangible under Topic 350 is an issue for many participants who treat crypto assets as a means for investment and active trading and does not appropriately reflect the economics of the assets in the financial statements,” the letter states. Under the current model, “companies will only have the ability to write down the value of crypto assets and will not have the ability to recognize any gains until the assets are transferred to another party,” which is “ misleading” and “the balance sheet will not reflect the true liquid nature and value of these assets.”
Recently, a bipartisan congressional group raised similar issues in a letter to the FASB. (See Congress Pressing FASB to Tackle Accounting for Cryptocurrencies in the May 17, 2021, edition of Accounting & Compliance Alert.)
The letters come on the cusp of the board’s efforts to establish its five-year technical agenda. The FASB’s agenda consultation document will be issued by June 30 to solicit’s the public’s feedback on whether to tackle digital currencies, among other topics.
Typically, a project makes it to the board’s technical agenda if the topic is sufficiently pervasive, there’s a lack of U.S. GAAP, differences exist among companies in accounting for like items, and if current rules are unnecessarily complex.
The ISDA made its case on grounds of pervasiveness, stating Bitcoin and Ethereum have a market capitalization of approximately $838 billion and $400 billion, respectively—about 12 percent of gold’s total $10 trillion market capitalization.
Large exchanges such as the Chicago Board Options Exchange (CBOE) and Chicago Mercantile Exchange (CME) are offering derivatives on crypto assets, “and traditional banking and brokerage companies, are beginning to offer crypto derivative products as well,” are among the developments the letter flags.
“Banks are offering crypto assets related products and services “have been setting up trading desks to provide customers with exposure to crypto assets, including buying and selling crypto assets, as well as derivatives, structured notes and other transactions that reference crypto assets,” Hyman and Corbi wrote.
“Not only have new derivatives products and financial arrangements linked to cryptocurrency been introduced to the market, but consumer products are also being made available,” the letter states. “Companies are also creating investment vehicles, such as trusts, in order to give market participants an opportunity to invest in digital assets through traditional investment products.”
This article originally appeared in the June 10, 2021 edition of Accounting & Compliance Alert, available on Checkpoint.
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