Companies should be required to present crypto assets separately from other intangible assets on the balance sheet because they have different measurement requirements, the FASB said on Dec. 14, 2022, advancing on a proposal it is developing for tokens such as Bitcoin.
This presentation approach would result in a prominent display of crypto assets, providing investors with clear and transparent information about the fair value of crypto assets within the financial statements, according to the discussions.
“We have different measurement basis for different types of intangible assets and so commingling those could be confusing,” FASB Member Christine Botosan said. “If we just think about how this class of assets produces cash flows it’s really fundamentally different than most other types of intangible assets – they’re much more likely to generate market participant cash flows as opposed to entity specific cash flows so they’re very different in that respect and the level of risk exposure arising from these assets is different from your typical intangible asset as well,” she said. “So separate presentation on the balance sheet is going to just provide more decision useful information for investors than having it grouped in with other things that are just not like it.”
The board also hammered out where the information should go, voting to require that entities present gains and losses on crypto assets in net income and present them separately from changes in the carrying amount of other intangible assets that are measured using other measurement basis.
This approach is one that investors would favor as some prefer to see the volatility reflected in net income, the discussions indicated. Furthermore, reflecting all changes in net income would eliminate the artificial volatility that existed in current GAAP and provide users with the more complete and accurate understanding of the period-to-period volatility in crypto assets.
“I think the presentation of these changes is best done going through income,” FASB member Frederick Cannon said. “I think it provides more transparency for users and I also think that these today are primarily being held as speculative investments and I think that the volatility is actually what provides value, so I do believe going through income is necessary,” he said. “I also think that the separation of this from other intangibles is important.”
The board will also propose guidance in relation to transactions where an entity is receiving crypto in a noncash transaction where crypto is facilitating an exchange, according to the discussions.
“If you took an entity that moved its model to receive crypto for the entirety of its revenue recognition portfolio, I think you’d have a noncash revenue transaction and then that subsequent sale of crypto,” FASB Vice Chair James Kroeker said. “Let’s say that their policy was to sell it immediately, I think some would view that as an entity having no operating cash flow but all of that subsequent sale of crypto being an investing cash flow and I’m not sure that’s an accurate portrayal of the economics of that activity,” he said. “I appreciate that maybe you could look at current GAAP to get a different answer, but I’d like to provide a clear path to operating.”
Disclosures
In terms of disclosures, the board agreed to a robust package that would require the following:
- fair value disclosures from Topic 820, Fair Value Measurement;
- disclosure of significant crypto asset holdings;
- disclosure of a rollforward of crypto asset holdings;
- disclosures of restrictions of crypto assets.
Interim disclosures would also be required, including information about an entity’s significant holdings by fair value as of period-end.
Prior Decisions
The decisions piggyback on the FASB’s prior decisions to develop an accounting standard for fungible tokens, deemed to be intangible assets, secured through cryptography on a blockchain or distributed ledger, and do not provide the asset holder with enforceable rights to or claims on underlying goods, services, or other assets.
Those tokens would be required to be measured at fair value under Topic 820. An entity would recognize certain costs incurred to acquire crypto assets such as commissions as an expense unless there is some kind of industry guidance that would suggest otherwise for those entities.
Next Steps
The overall decisions are what will be included in an exposure draft which the board aims to issue for public comment during the first half of 2023.
Discussions will continue next year, including to potentially revise the scope of the rules – i.e. whether or not the project should address issuers of crypto assets, according to the Dec. 14 discussions. The board will also vote on transition, comment period for the proposal, and miscellaneous issues.
This article originally appeared in the December 15, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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