Cryptocurrencies – tokens like Bitcoin and Ethereum – should be measured at fair market value as that reflects the underlying economics of those transactions, the FASB ruled on Oct. 12, 2022, a win for investors who pushed for that outcome.
“We’ve heard from investors that they want transparency through disclosure and the only way to get to that is through fair value,” FASB member Gary Buesser said. “I’m looking at a chart for Bitcoin over the last year-and-three quarters – it’s ranged from twenty thousand to sixty thousand back to nineteen thousand ninety-six, so the only way to get any kind of real information on the holding of Bitcoin or Ethereum is through fair value.”
The guidance would be limited to 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.”
The ruling means those assets would be measured in accordance with Topic 820, Fair Value Measurement, and increases and decreases in fair value recognized in comprehensive income in each reporting period.
In general, the board said this approach would best align the measurement of crypto assets with that of other assets held for investment purposes such as financial instruments that are recorded at fair value. Fair value measurement would also align with those entities that follow specialized industry guidance or regulatory guidance that require fair value.
“It better reflects the economics of what’s going on today with crypto assets,” FASB member Fred Cannon said. “It addresses the issue that we’ve been asked to address in terms of where the economics and the current accounting are misaligned and it also aligns the accounting for crypto assets that are deemed to be intangibles with how crypto assets are valued elsewhere in the codification.”
Today, entities that hold crypto assets and do not follow specialized industry guidance in U.S. GAAP or certain regulatory guidance measure those assets at historical cost less impairment. In practise, crypto assets are impaired to the lowest observable fair value within a reporting period. Those impairment losses are presented in comprehensive income and cannot be reversed if there are subsequent increases in value. The board heard that generally that measurement model does not provide useful information to financial statement users because the underlying economics of these assets is not appropriately reflected in financial statements. Also, accountants have said it is costly to identify the lowest observable price during a reporting period for the purpose of testing for an impairment.
Votes 4 to 3 to Expense Costs to Acquire Cryptos
The board also ruled on whether costs to acquire crypto assets, such as commissions and other transaction fees, should be capitalized or expensed as incurred, voting 4 to 3 to require them to be expensed.
Chair Richard Jones, Vice Chair James Kroeker and Board members Susan Cosper and Marsha Hunt favored expensing the costs, agreeing with staff that this would provide simplicity and greater visibility into the holding of gains and losses due to price changes and would also eliminate the potential for diversity in practise.
“We probably should be explicit here in order to eliminate some of the diversity in practise and for that I’m in agreement with the staff that expensing is the better route,” FASB member Susan Cosper said. “But I agree that we probably need to be clear as to what that expenses is.”
FASB members Christine Botosan, Buesser, and Cannon voted for costs incurred to be capitalized, stressing that would better reflect the gains and losses during the holding period than expensing.
On two other issues – whether to allow a measurement option for inactive markets, and whether to provide additional implementation guidance: the full board decided against an option; and against requiring additional implementation guidance.
Moreover, the rules decided upon thus far would be applicable to both public and private companies, the board agreed.
Next Steps
The decisions are a key step for the FASB toward the development of a proposal that will be issued for public comment. The guidance is being spurred by the huge growth of the crypto market which bounced to nearly $1.7 trillion in late February 2022 from $338 billion in late October 2020.
Next, board deliberations will continue at a future meeting to determine how crypto assets should be presented and which disclosures should be required, according to the discussions. Other issues, including how to transition the rules will also be addressed.
This article originally appeared in the October 13, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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