The FASB on December 13, 2023, issued its first direct accounting and disclosure standard on crypto assets to provide guidance that more accurately reflects the economics of Bitcoin and similar tokens in financial reports.
The rules require crypto assets that meet six characteristics to be measured at fair value each reporting period with changes in fair value recognized in net income—enabling upswings of tokens to be captured. The assets must be separately presented on the balance sheet from other intangible assets as well as separately shown in the income statement when remeasured.
Further, businesses need to provide substantial disclosures so that investors can understand their crypto asset holdings, significant holdings, contractual sale restrictions, and changes during the reporting period, according to the rules’ text.
The standard is a welcomed first step, covering tokens that hold up to about 75% of market capitalization, those in the crypto sector said moments after issuance.
“It’s a big baby step in the right direction because when you think about this guidance it arguably covers a majority of the market capitalization of cryptocurrencies, because it’s going to hit the big stuff like Bitcoin and Ethereum which alone are upwards of 60, 75% of market capitalization for the crypto industry,” Matt Graham, senior manager at Moss Adams, said. “It’s good in terms of its broad coverage of value but it’s not great in terms of its low coverage of asset types,” he said. “That said, it’s better to take a step in the right direction than to not do anything at all or wait until we have a massively comprehensive framework that covers everything.”
The provisions were issued as Accounting Standards Update (ASU) No. 2023-08, Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets, and take effect for fiscal periods beginning after December 15, 2024, including interim periods within those years. Earlier application is permitted.
The standard comes quickly, just nine months after the FASB proposed it in response to heavy lobbying by the crypto marketplace, which pressed for rules in US GAAP. The board heard that current provisions do not allow tokens to be accurately reported and thus hinder rather than help investors. Specifically, businesses complained that they were not able to record increases in the value of tokens after rebounds from losses, which was a poor reflection of the underlying economics of those assets.
Currently, the crypto sector is reinvigorated — stemming from a recent run up in crypto prices, particularly with Bitcoin up more than 130% this year.
Many companies have been building during the crypto winter and are now ready to launch initiatives, Aaron Jacobs, head of accounting at TaxBit Inc., said. “There’s been a significant interest in a Bitcoin sponsored exchange-traded fund, and many are preparing for that to become a reality,” he said. “We’re also seeing more Web3 projects funded for the second half of 2023 than we did earlier this year. In short, it’s fair to say that the sector is headed in the right direction.”
Substantial Disclosure Requirements Set
In developing the standard, the FASB focused narrowly on crypto assets that meet the following six criteria: an intangible asset; cannot provide the holder with enforceable rights to or claims on underlying good, services or other assets; created or resides on a distributed ledger based on block chain or similar technology; secured through cryptography; is fungible; and is not created or issued by the reporting entity or its related parties.
In addition to the fair value measurement and presentation provisions, substantial disclosures are required to be provided to give investors a better understanding of the items in question, according to the rules’ text.
This means that for annual and interim periods, businesses are required to disclose the name, cost basis, fair value, and number of units for each significant crypto asset holding and the total fair values and cost bases of the crypto asset holdings that are not individually significant. For crypto assets that are subject to contractual sale restrictions, the business must disclose the fair value of those crypto assets, the nature and remaining duration of the restriction, and the circumstances that could cause the restriction to lapse.
On an annual basis, the business needs to also disclose:
- a rollforward of the combined activity in the reporting period for crypto asset holdings, including additions and a description of them, dispositions, gains, and losses
- for any dispositions of crypto assets in the reporting period, the difference between the disposal price and the cost basis and a description of the activities that resulted in the dispositions
- if gains and losses are not presented separately, the income statement line item in which those gains and losses are recognized
- the method for determining the cost basis of crypto assets
This article originally appeared in the December 14, 2023, edition of Accounting & Compliance Alert, available on Checkpoint.
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