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US Securities and Exchange Commission

Staff Accounting Bulletin on Crypto Safeguarding Obligations is Not SEC Rule, Senior Official Says

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 7 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 7 minute read

During a financial reporting conference, the SEC’s top accounting official emphasized that Staff Accounting Bulletin (SAB) No. 121 related to safeguarding obligations of cryptos only represents the staff’s views.

This comes as many critics, including SEC Commissioner Hester Peirce, said that the commission has not followed proper due process of rulemaking or let the FASB work out accounting issues as the board is the independent accounting standards setter for U.S. GAAP.

Moreover, there was some initial pushback from the crypto industry, and banks have also been critical of SAB No. 121, heavily lobbying against it.

SAB 121, which was issued at the end of March to better protect investors, describes how companies should account for custodial services of crypto assets. Because of risks unique to crypto, the staff determined that companies should record a liability and corresponding asset on their balance sheets at fair value.

“A SAB is not a commission rulemaking; it is not an official pronouncement of the commission. It is—as the S in SAB implies—the views of the of the staff. It is not standard setting. That’s what the FASB does. So, what a SAB is intended is to communicate the staff’s view about the application of current GAAP to an existing fact pattern” in emerging issues, SEC Acting Chief Accountant Paul Munter said during a fireside chat at the Corporate Financial Reporting Insights Conference hosted by the Financial Executives International in New York on Nov. 7, 2022.

Accounting for digital assets is indeed an emerging issue as crypto is rather a new type of asset.

The SEC in the past 50 years or so has published 121 SABs. On average, it is about two and a half SABs a year. Munter said that the staff in the Office of the Chief Accountant (SAB) has only issued three over the last four years or so.

“We haven’t issued it with a great degree of frequency, but what we try to do is be as transparent as we possibly can,” he said. “And when we’re seeing a number of transactions or a number of issuers that have similar transactions, and there is a lack of clarity about what the accounting guidance should be for that, we think a lot about ‘well, is this something that should be communicated more broadly?’ Sometimes, we do it in a staff accounting bulletin as we did it in SAB 121. Sometimes we do it in other ways.”

For example, he also issued a statement related to the application of GAAP to warrants for SPACs.

“So, we have different ways of communicating things, but it’s all with the idea of trying to be helpful to issuers. And to the extent we can, [we] get out ahead of practice where you might have challenges that develop if guidance is not provided. And we certainly think about how is it we would best do that and best facilitate issuers’ ability to issue GAAP-compliant financial information. So, it’s not standard setting, it’s not rulemaking,” Munter explained. “It is the expression of the staff’s view about application of current GAAP to specific fact patterns and kind of taking it a step further. The conclusions in a SAB apply as long as the fact patterns and the relevant GAAP continue to exist.”

To better explain the purpose of a SAB, he said some bulletins were rescinded in the last five to seven years because, for example, the FASB has changed GAAP and the conclusions in the relevant SAB were not longer applicable.

More Reasoning Behind and Explanation of SAB 121

During the fireside chat, Munter provided more insights into the development of the staff interpretive guidance.

Most of all, he clarified that the SAB is not about determination of whether a particular cryptocurrency is a security. As he is not an attorney, he said he is not qualified to speak about it with authority.

“That being said, there are folks who …think that at least some portion of a digital asset meets the definition of securities,” he said.

If a token meets the definition of a security, then it must be registered with the SEC. Moreover, if an exchange has securities that are being traded, then it must register as an exchange. There are some challenging aspects to whether a token comes under securities or commodities laws, and respective staff of the two agencies are working currently through it.

“On the accounting side, let me first observe that because something meets the federal securities laws definition of a security does not mean that it meets the accounting definition of a security,” Munter emphasized. “In fact, most of them don’t meet the accounting definition of a security. So, from an accounting perspective, we’re not in the securities part of accounting.”

Thus, this is not about FASB Topic 321, Investments—Equity Securities, or Topic 323, Investments—Equity Method and Joint Ventures.

“That means for the most part, if you are the holder of digital assets, you’re probably in the intangibles part of GAAP,” Munter explained. Currently, the FASB is working to revise Topic 350Intangibles—Goodwill and Other, for a subset of crypto. A proposal is expected sometime in the first half of next year.

With SAB 121, Munter said that OCA was not looking at the accounting by the crypto holder. It was only about entities that safeguard digital assets for others who own the cryptos. And OCA thought about what the accounting should be.

“We are looking at it through the lens of what accounting outcome will result in useful information for investors, recognizing that some other regulators have different regulatory mandates. Ours is investor protection and investor-focused regulatory mandate,” Munter explained. “We looked at that question through the lens of what is it that will be useful information for investors.”

Unlike traditional assets, the staff explained in the bulletin that the safeguarding responsibility has unique risks, including technological risks, regulatory uncertainty, among others. Moreover, the market is still trying to figure out what happens in the event of a bankruptcy.

Thus, “we concluded that the obligation to safeguard crypto on behalf of another party meets the FASB’s conceptual framework definition of a liability. It is a present obligation and requires the safeguarding party to expend resources to meet its obligation, and therefore [we] concluded that that should be on the balance sheet of the party that is safeguarding those assets,” Munter said.

Then the SEC staff had to figure out how that safeguarding obligations should be measured. He said that there is not a lot of guidance in the FASB’s conceptual framework; thus, the SEC staff concluded that fair value was the appropriate way to measure the obligations.

“I would also note, by the way, that there are other custodial arrangements that do end up on balance sheet. Now, let me give you the most basic one, which is a depository institution taking demand deposits,” Munter added. “And what they’re really doing is they’re safeguarding the cash for their customers, right? And think about their accounting. They recognize a liability when you as a customer make a deposit into your demand deposit account. They recognize the liability; they also recognize the cash. Now, I’m not saying that safeguarding crypto is the same thing as safeguarding a demand deposit. What I am saying is, each arrangement has to be evaluated on its own facts and circumstances, and different risk characteristics can lead to a different accounting conclusion for that particular arrangement.”


This article originally appeared in the November 10, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.

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