On December 13, 2023, the Financial Accounting Standards Board (FASB) finalized Accounting Standards Update (ASU) 2023-08 “Accounting for and Disclosure of Crypto Assets”. The amendments in the expedited ASU aim to improve the reporting of crypto assets by requiring entities to present crypto assets at fair value instead of the previously used cost-less-impairment model.
The ASU will be effective for all entities, starting with fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Entities are able to early adopt the ASU for both interim and annual financial statements that have not yet been issued or made available for issuance. The amendments in this ASU require a cumulative-effect adjustment to the opening balance of retained earnings or net assets as of the beginning of the annual reporting period in which an entity adopts the amendments.
- Standardization: The FASB's guidance offers a unified approach to crypto accounting, acknowledging the growing role of digital assets in finance.
- Fair Market Valuation: Cryptocurrencies will now be valued based on their current market price, a shift from the historical method of carrying crypto assets at cost-less impairment. This change allows for a more accurate reflection of a company's financial standing in relation to its crypto holdings.
- Dynamic Impairment Model: The new rules allow for adjustments in the value of digital assets with market changes, ensuring more realistic financial reporting.
- Tax Considerations: With the alignment of book and market values, companies might face new tax liabilities, given the volatile nature of cryptocurrencies. Strategic planning is essential.
- Future-Ready Approach: The guidance prepares for an evolving crypto market, potentially encouraging more businesses to incorporate digital assets in their portfolios.
This new ASU applies to assets that meet all of the following criteria:
- Meet the definition of intangible assets per the FASB.
- Do not provide the asset holder with enforceable rights to or claims on any underlying goods, services, or other assets.
- Are created or reside on a distributed ledger on blockchain or similar technology.
- Are secured through cryptography.
- Are fungible (NFTs do not fall under this new guidance).
- Are not created or issued by the reporting entity or its related parties.
Disclosure Guideline for Reporting Entities
In addition to recording crypto assets at fair market value, the new guidance provides a clear disclosure guideline for reporting entities to follow, which include:
For annual and interim reporting periods:
- The name, cost basis, fair value, and number of units for each crypto asset holding and the aggregate fair values and cost bases of the crypto asset holdings.
- For each crypto asset that is subject to sale restrictions, the fair value for those assets, the nature and remaining duration of the restriction, and the circumstances that could cause the restrictions to lapse.
For annual reporting periods:
- A roll-forward of activity for crypto asset holdings, including additions, dispositions, gains, and losses.
- For any dispositions, entities must disclose the difference between the disposal price and the cost basis.
- If gains and losses are not presented separately, entities must disclose the income statement line item where gains and losses are recognized.
- The method for determining the cost basis of crypto assets.
The FASB’s guidance is a landmark development in the world of cryptocurrency. It provides a practical, realistic, and adaptable framework for accounting digital assets, marking a significant step forward in their acceptance and integration into mainstream finance. This guidance could be the catalyst needed for a broader adoption of digital assets, as it addresses many of the uncertainties and challenges previously associated with their accounting and reporting.