New Subtopic for Crypto Assets to be Added to Intangibles Section of U.S. GAAP by Year-End

The FASB plans to add a new subtopic number for crypto assets into the intangible assets section of the codification of accounting standards by year-end, according to a Sept. 29, 2023, joint educational session by the U.S. board and the IASB.

The rules were developed despite not meeting the “pervasiveness” and “diversity among companies” checklist that is typically used by standard setters to determine whether to add a topic to their technical agendas, the discussions indicated.

“We did have diversity in practice but not diversity within companies that were applying the intangibles guidance,” FASB member Christine Botosan explained. “And then on the pervasiveness issue, I really struggled with adding this project because of the pervasiveness question,” she said. “If that was the only reason I was being asked to add this project I still wouldn’t be there today, because as we keep tracking we ask every investor advisory group, ‘how many of you are actually investing in companies that do this?’ no hands go up. ‘How many of you are actually accepting this or holding it on your balance sheet,’ no hands go up.”

Her remarks were in response to questions posed by IASB Members Bruce Mackenzie and Ann Tarca on the FASB’s choice to take up the topic. “Did you hear a lot of feedback that people said this is something you need to pick up?” Mackenzie asked; and similarly, Tarca said, “I think from what you’re saying you didn’t have a diversity issue, but what you have is you’re responding to offering a better way of measuring?”

“So it’s still not prevalent but the accounting under the cost impairment model clearly was not the right accounting so I think we finally got to a place where had a narrow enough scope we could deal with that one issue,” Botosan also said. “But I would say it still remains to be seen whether this becomes really prevalent in the economy or not.”

The IASB last year decided it would not add a project on crypto assets to its agenda, stating it was not pervasive in international waters, and rules already exist in IFRSs. However, recently, the board signaled that crypto assets may be addressed under its current intangibles project. (See Accounting for Cryptocurrencies Might be Addressed in New Intangibles Project, IASB Chair Says in the July 10, 2023, edition of Accounting & Compliance Alert.)

Rules Will take Effect in 2025 but Applicable Earlier

The FASB’s standard will take effect in 2025 with earlier application permitted. The guidance will be required to be applied on a modified retrospective basis.

The standard was developed after the crypto marketplace pressed the board heavily for an accounting standard that better reflects the underlying economics of tokens like bitcoin—highly volatile assets whereby the ebb and flow in value is not effectively captured in current rules.

“I think we got a lot of feedback that measurement was something we needed to pick up but then we got a lot of different feedback on other related issues,” FASB Chair Richard Jones said. “Where I think our board was pretty disciplined was we thought measurement was the most important element that we should deal with,” he said. “We didn’t want to start dealing with every single carryon issue there was, because there’s a slew – we could become the ‘cryptocurrency accounting standards board’ very quickly and we thought this makes sense.”

Overall, the board received “very positive feedback across the board” on Proposed Accounting Standards Update(ASU) No. 2023-ED200, Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets, a March exposure draft that the board kept intentional narrow to deal specifically with the type of plain vanilla crypto assets that generated the most concern from investors.

“Most were very supportive of moving towards a fair value model for certain crypto assets,” FASB Technical Director Hillary Salo said. “Much of the feedback that we got was looking for the FASB to take on more broader issues related to the crypto asset space,” Salo explained.

Standard Comes with Robust Disclosures

The forthcoming guidance will address crypto assets that have six characteristics: meet the definition of intangible asset as defined in the Codification Master Glossary; do not provide the asset holder with enforceable rights to, or claims on, underlying goods, services or other assets; are created or reside on a distributed ledger based on blockchain or similar technology; are secured through cryptography; are fungible; and are not created or issued by the reporting entity or its related parties.

Under the provisions, public and private companies with those types of tokens will be required to measure them at fair value and report changes in fair value in net income – an accounting treatment that better reflects the underlying economics of the assets. The assets will also be required to be reported separately on the balance sheet from other intangible assets.

Another factor is that companies will be required to apply existing cash flows statement guidance. However, if the company receives crypto assets in the ordinary course of business, i.e., as a payment from a customer and those crypto assets are received and converted nearly immediately into cash, then those assets will be required to be presented as a cash flow from operating activities.

Further, the guidance will require an extensive package of disclosures.

Specifically, at interim and annual periods for each significant holding (by crypto asset type), a business will be required to provide the number of units held, their cost basis, their fair value and any restrictions on the sale of those crypto assets and the nature and the remaining duration of those restrictions.

Moreover, in annual periods, businesses will be required to provide a rollforward of crypto asset activities during the year with certain supplemental information such as historical realized gains or losses.