On September 06, 2023, the Financial Accounting Standards Board took a bold and definitive step towards formalizing and adopting accounting and disclosure guidance for crypto assets. The new guidance will fall under FASB ASC 350-60 Intangibles – Goodwill and Other – Crypto Assets – Accounting for and Disclosure of Crypto Assets.
The Board approved for finalization the crypto asset guidance that would require entities to subsequently measure crypto assets that are in-scope at fair value in accordance with Topic 820, Fair Value Measurement. The finalization of this guidance is a culmination of a long consultation, comment letter and discussion process by the Board, which began in 2013.
In-Scope Crypto Assets
It is expected that the guidance would apply to crypto assets that meet all of the following criteria:
- Meet the definition of intangible asset as defined in the Codification Master Glossary
- Do not provide the asset holder with enforceable rights to, or claims on, underlying goods, services, or other assets
- Are created or reside on a distributed ledger based on blockchain technology
- Are secured through cryptography
- Are fungible
- Are not created or issued by the reporting entity or its related parties
The scope of the guidance is expected to exclude:
- NFTs as they are inherently “Non-Fungible”
- Stablecoins as they are pegged to a fiat currency and, therefore, have enforceable rights to another financial asset
- Wrapped tokens due to the fact they provide the holder of the wrapped token with the right to another asset
What Are the Key Expected Requirements in the Upcoming Guidance?
The highlight is that under the new standard, all entities will now account for digital assets that are classified as “Crypto Assets” at fair value at the end of each reporting period, and gains and losses resulting from changes in fair value will be recorded within other comprehensive income (and operating income for investment companies). Before this guidance, crypto assets were recorded at cost and tested for impairment each reporting period. Due to the high volatility of digital assets, many companies did not believe that the accounting methodology matched the actual economics of the asset class. Investment companies (under FASB ASC 946) accounted for Digital Assets at fair value and recognized gains and losses through operating income as fair valued changed. The crypto industry sees the suggested changes as a positive move towards the wider crypto adoption. Specifically, moving crypto into the accounting rules means reporting entities will make gains and losses for in-scope crypto assets a part of their quarterly financial reporting.
The guidance is expected to require separate classification and presentation of the crypto assets on the balance sheet, and a separate presentation of the fair value changes in the income statement. Reporting entities are expected to be required to disclose significant holdings, restrictions on the sale of crypto assets and reconciliation of crypto assets held during the period with supplemental information.
The Board has approved the Staff to draft the final wording of this guidance with the new accounting standard, effective for fiscal years starting after December 15, 2024. The final language is expected to be approved in a written vote before the end of the year.
How Should Reporting Entities Prepare?
The new accounting guidance will have far-reaching implications for reporting entities with significant crypto asset holdings that are in scope. First, determining whether the crypto asset holdings are in scope would not be simple for certain types of crypto assets. Reporting entities will have to consider whether they have reliable accounting IT systems, processes, and controls in place to apply the fair value measurements and how fair values will be determined for those in-scope crypto assets with inactive markets. The impact of the crypto asset value fluctuations on the stability of the income statement would have to be considered. The steps to be taken to implement the disclosure requirements, including reporting on other information such as MD&A for public entities, would also have to be considered.