In response to a question at a conference about whether the Public Company Accounting Oversight Board is thinking about providing audit guidance on U.S. Securities and Exchange Commission Staff Accounting Bulletin (SAB) No. 121 related to crypto assets, board Acting Chief Auditor Barbara Vanich said the staff will consider it.
“As part of our work, we do monitor what’s going on in the environment. We have been paying attention, like you’ve heard from other regulators at this conference, to what is going on in the crypto space. Today, it’s been small at the issuer level, but we are certainly happy to take that one back and give it some consideration,” Vanich said on Sept. 14 at the 2022 AICPA & CIMA Conference on Banks & Savings Institutions in National Harbor, Maryland.
The SEC’s Office of the Chief Accountant at the end of March issued SAB 121 for companies that have custody of crypto assets that belong to customers. These companies are required to include a safeguarding liability and a related crypto asset on their balance sheet at fair value.
In particular, Vanich answered the question about how an accountant would apply audit procedures over a balance sheet that was historically off-balance sheet.
“If whoever submitted that question has … more specifics on that topic or on other topics of what specific kind of guidance people are interested in seeing…, that’s very helpful for us,” Vanich added.
Bank Regulators Say SAB 121 Has Been Hot Topic
Chief accountants at banking agencies, who also spoke at the AICPA conference, said SAB 121 has been a hot topic for them.
Amanda Freedle, chief accountant of the Office of the Comptroller of the Currency (OCC), said that when SAB 121 was issued, “we have really had a number of conversations across the agencies with the bankers, industry groups and auditors to really understand ‘what does this mean, and what are the implications.’”
A complicated question has been what SAB 121 means for regulatory capital.
“There are a number of parties that are involved to try to dive into this as well as other questions related to SAB,” Freedle said on Sept. 13. “We developed an interagency cross-functional working group to figure out what is next, and how do we move forward. And we have people from our accounting teams, legal, asset management and capital, of course, working together to try to figure out how all of this is going to work.”
“This issue is kind of tricky for us. As you know, GAAP is our starting point for regulatory reporting. It’s the starting point for regulatory capital as well,” she further explained. “And we try to minimize the differences between GAAP reporting and the regulatory capital. And this one is also unique because we also try to minimize the different capital treatment for our public institution and private institutions.”
Freedle said that bank regulators have not arrived at a conclusion on what it means for regulatory capital. “Everything is on the table that’s being discussed.”
Lara Lylozian, chief accountant of the Federal Reserve, provided a little bit more perspective about banking agencies’ role on digital assets. Customers want to buy, hold and sell cryptos through existing banking relationships, and banks want to meet that demand.
“To do that, they need answers to key questions. So, banking agencies have spent a good part of last year going through policy sprints,” Lylozian said. As a result, bank regulators in November 2021 issued a joint statement with a roadmap of how some of the key questions will be answered.
Since then, they have made some progress to provide clarity, permissibility, safety and soundness considerations, and compliance related to engagement by financial firms in five areas: crypto-asset safekeeping and custody services; facilitation of customer purchases and sales of crypto assets; loans collateralized by crypto assets; issuance and distribution of stablecoins; and activities involving the holding of crypto assets on the balance sheet.
“The banking agencies are connected to discussions and work underway at other agencies like the SEC, Treasury. There’s also the President’s Working Group on stablecoins; there’s discussions and more talk… internationally at the Basel Committee and the Financial Stability Board,” Fed’s chief accountant said. “I also sense us proceeding with caution because it is complex.”
New Fed Vice Chair Michael Barr has emphasized that bank supervisors must work together to make sure that banks’ crypto activities are well-regulated based on a principle of same risk, same activity and same regulation regardless of the underlying technology used for those activities. SEC Chair Gary Gensler has also made similar remarks.
“With all these discussions underway, accounting is certainly in the mix,” Fed’s Lylozian said. “In the beginning, we had more of a supporting role, trying to educate everyone on the basics of accounting for crypto assets within the existing accounting framework: things like how does intangible asset accounting work; how to determine fair value; what’s on and off the balance sheet with custodied assets. But thanks to SAB 121, accounting took a starring role in these discussions. And we were front and center again. I think it’s been an opportunity for my team in particular to dig deeper than we had been before, to learn more and to get connected… to a wider group of stakeholders that are working through these issues related to digital assets.”
She said there is a perception that SAB 121 is not material for banks because they have not really been engaged in safekeeping activities yet.
“And so that’s also a part of the discussions here. And what we’ve been encouraging was, we’ve had conversations with bankers is, ‘you know, take your fact patterns to the SEC, they are open for business,’” Lylozian said. “And the more you take those questions and fact patterns and arrangements to the SEC, the more they will sort of be forced to draw some parameters. And we started out with the scope of SAB 121 being so expansive, you know, so it will help like to better understand the contours of SAB 121, and how to think about it which, you know, plays into the regulatory capital discussions we are having.”
SEC Acting Chief Accountant Munter: More Guidance Coming?
In the meantime, the SEC OCA has not decided yet whether more crypto accounting guidance will be coming.
“We’ve got a lot of consultations on a whole variety of crypto arrangements,” SEC Acting Chief Accountant told Thomson Reuters on Sept. 8 in response to whether another SAB related to crypto will be issued, for example, for lending transactions. “We are always thinking about ‘are these issues that we need to disseminate more broadly. Now, we haven’t made any decisions about that. But we are certainly seeing a number of different arrangements.”
The FASB also has a narrow crypto accounting standard-setting project that would apply certain fungible tokens that apply as intangible assets.
“So, it would be crypto assets that under current GAAP would be accounted for as intangibles. But under current GAAP, intangibles, you can only have impairment, you can’t have a write up,” Munter said. “I think they are going to consider whether some portion of those should be measured at fair value. That’s for the FASB to decide.”
This article originally appeared in the September 28, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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