The Financial Accounting Standards Board (FASB), which regulates accounting under US GAAP, recently voted to update crypto asset accounting guidance. Their goal is to increase transparency in cryptocurrency activities.
This article explores how this news affects CFOs and Web3 enterprises. Also, how companies should prepare to face the changing panorama for current accounting mechanisms and the immediate and future impacts.
TL;DR: What does the announcement mean on a high level?
- No more impairment charges.
- Businesses can hold digital assets at fair value, recognizing gains and losses immediately.
- Wrapped tokens and NFTs excluded and will still be kept under intangibles.
- Highly positive for web3 enterprises and institutional adoption, addressing previous challenges of reporting discrepancies between carrying and fair market values.
- Effective date & early adoption: All entities will apply effective after fiscal years beginning after Dec 15, 2024, including interim periods within those fiscal years for all entities.
Companies must get ready now for upcoming changes to crypto accounting requirements. Finance team leaders have to understand the potential impact of such changes on their business operations and financial statements.
Below are the scope and key aspects of the updated accounting guidance to the new changes in crypto accounting.
The scope of the FASB’s new accounting guidance can vary depending on the specific Accounting Standards Update (ASU). But in general, crypto assets or digital assets are within this new scope, if they meet the following criteria:
- They comply with the definition of an intangible asset and do not represent a contract or provide enforceable rights.
- They are built or located on a blockchain.
- They are fungible, like ERC 20 standard, digital tokens.
Fair Value Treatment
Businesses must record the fair value of cryptocurrency assets, and reflect the the fair value changes in earnings. It is contrary to existing accounting guidelines. Currently, it is mandatory that companies store cryptocurrency assets at cost less impairment, this constitutes a substantial departure. The analysis for asset impairment and the accounting of impairment expense will no longer be necessary under the revised rules. Rather, earnings will need to reflect any changes in fair value (both up and down).
This update to accounting rules means that the financial health of a company that holds crypto is much clearer than it has been in the past. To demonstrate this point let’s take Tesla’s case:
Elon Musk’s Tesla, famously purchased around $1.5b of Bitcoin in 2021. In Q2 of 2022 they sold some of that position resulting in a profit of approximately $106m. However, because Bitcoin was treated on their financial statements as an intangible asset, Tesla had to record a loss on the Bitcoin they hadn’t sold. Having a fairly material impact to their balance sheet than the reality at the time reflected. The fair value treatment rules would have alleviated this issue.
Credit: James Duncan Davidson | Copyright: CC BY-NC 3.0
Balance Sheet and Income Statement.
A business will list its cryptocurrency-related transactions separately on the income statement and balance sheet. This will make it simple for stakeholders to recognize a company’s cryptocurrency asset activity.
New disclosures will be necessary for holdings in cryptocurrency assets as well as for ongoing activity.
Wrapped Tokens not Included.
The new accounting rules are not covering Wrapped tokens, according to the Board’s decision. This indicates that wrapped tokens have to be treated similarly to legacy intangible assets in terms of accounting. Businesses’ balance sheet must include them at cost minus impairment. And then, report the realized gains and losses when these assets are sold.
GAAP vs. IFRS
The news detailed in this ruling modifies US GAAP directly. It better aligns with IFRS. But, there are key differences in recognition, measurement and impairment used to record and report digital assets.
How should your company prepare?
The FASB staff will continue with the final drafting now that the Board has chosen to move ahead, and they plan to publish it by the fourth quarter of 2023. Companies will have the choice to implement these regulations in advance.
The next steps for companies affected by these accounting changes include:
- Assessing the impact on their organization and
- Locating any gaps in the current accounting processes.
Intangible assets must already be listed as a line item on balance statements for businesses. Corporations will be required to make a separate entry for their crypto assets under the new regulations.
Additionally, in each reporting period, you must identify large crypto holdings as well as any limitations on those holdings in their footnotes. However, the FASB emphasized that they will not require to incorporate details regarding the reception of crypto assets as payments and promptly converted to cash in the reconciliation activity.
The FASB decided that since cryptocurrencies will be valued at fair value, businesses must make the disclosures required by ASC 820, the related accounting standards so that readers of financial statements can understand how businesses determined their valuations.
On our project on accounting for and disclosure of crypto assets, you’ll see (…) that we’ve gotten the exposure draft out, we’ve gotten feedback from stakeholders (…). If our board decides to move forward, the next milestone could be a final standard which (…) will be issued in the fourth quarter.Richard R. Jones, FASB Chair
The Road Ahead
The journey toward digital asset accounting transparency may involve several milestones, including exposure drafts, public comment periods, and revisions based on stakeholder feedback.
The rapid evolution of digital assets has ushered in a new era in finance, one that demands innovative accounting solutions. As FASB continues to work diligently on digital asset accounting guidance, businesses and investors can expect a more structured and consistent approach to reporting their digital asset holdings and transactions.
As businesses and investors navigate this dynamic landscape, they must remain attentive to the developments and updates from FASB and other regulatory entities.
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By embracing these changes and aligning their practices with emerging standards, they can confidently embrace the future of finance in the digital age.