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Investors Suggest FASB Efforts on Crypto Should Study Fungibility of Those Assets

Denise Lugo  Editor, Accounting and Compliance Alert

Denise Lugo  Editor, Accounting and Compliance Alert

A FASB investor advisory panel said it supported the board’s recent decision to add a project to its technical agenda to provide rules on digital assets such as cryptocurrencies, as there are apparent areas in accounting that do not reflect the economics of those assets.

In scoping the rules, which could prove challenging, the board could differentiate between fungible (interchangeable) and non-fungible digital asset assets, according to Investors Advisory Committee (IAC) discussions on May 24, 2022.

“This is an evolving area, there’s lot of different types of digital assets but maybe not all of them would want to be valued the same way in the reporting,” Kevyn Dillow, vice president, senior accounting analyst at Moody’s Investors Service, said.

An overarching view by investors is that “we need more information on the types of assets that are being held and how the companies are valuing them so that investors can come to their own conclusions on them – how they want to view them and how they want to think about the value of those assets,” she said, summarizing the IAC’s views.

The IAC is a standing committee that is expected to work closely with the FASB in an advisory capacity to ensure that investor perspectives are effectively communicated to the board on a timely basis in connection with the development of financial accounting and reporting standards.

Crypto assets are transferable digital representations designed in a way that prohibit duplication and recorded on the block chain, which is a digitalized, decrentralized ledger. Many of those assets such as Bitcoin and Ethereum function as a medium of exchange but some provide rights to products or services.

Today, there are 18,142 cryptocurrencies, 460 crypto-exchanges and the market cap of cryptocurrencies amounts to $1.7 trillion – a huge drop by more than $1 trillion reported in November 2021. Every 24 hours, $91 billion worth of cryptos are traded, most of them Bitcoin or Ethereum, according to a March 28 report on the World Economic Forum, which has been pushing for regulation.

The topic was raised at the IAC meeting in light of the FASB’s addition of the project on May 11 to its technical agenda to develop a broad swath of rules on digital assets such as cyptocurrencies, a subset of digital assets. (See Accounting Rules Will be Developed for Crypto Assets, FASB Says in the May 12, 2022, edition of Accounting & Compliance Alert.)

The board said the topic has become sufficiently prevalent to warrant accounting rules that reflect the underlying economics of those types of assets.

In adding the project, FASB members acknowledged that scoping the topic is going to be challenging, including weighing the application of Topic 820, Fair Value Measurement, in light of the volatility of the crypto marketplace.

Interestingly, the board voted against including commodities in the mix – typically thought of in context of fungibility – as it would complicate the topic. When two or more things are interchangeable, can be substituted for each other, or are of equal value, they are described as fungible.

 

This article originally appeared in the May 27, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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