A little over a year ago, we wrote a blog post that explained the basics of cryptocurrency (or “crypto” for short), including some of the related accounting “rules” and challenges. I use “rules” lightly because currently, there are no U.S. accounting standards that specifically address digital assets (but more on that in a bit). It’s common practice to account for crypto as an intangible asset, which is accounted for at cost and is subject to impairment testing.
But as we all know, the crypto market is extremely volatile! And if a company determines a crypto asset is impaired and writes it down to current value, then they can’t write it back up!
To quote our crypto blog:
“As acceptance of cryptocurrency continues to gain traction and more corporations seek to allocate investment funds into crypto, it will be interesting to watch this space to see what guidance or actions, if any, come from the FASB.”
Well, well, well. A lot can change in a year, can’t it?
The FASB heard the grumblings from investors and stakeholders saying that the impairment aspect of the accounting was too complicated, and that it didn’t properly reflect the current economics of the crypto space. So, what was the result? In late March 2023, the FASB issued a proposed ASU, Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60), Accounting for and Disclosure of Crypto Assets, to address those concerns!
The proposed ASU actually creates an entirely new subtopic under ASC 350, which will be dedicated to crypto assets (ASC 350-60) and applies to a crypto asset held by a company where all of the following criteria must be met:
- Meets the U.S. GAAP definition of an intangible asset, which is: Assets (not including financial assets) that lack physical substance. (The term intangible assets is used to refer to intangible assets other than goodwill.)
- Does not provide the asset holder with enforceable rights to, or claims on, underlying goods, services or other assets
- Is created on (or resides on) a distributed ledged based on blockchain technology
- Is secured through cryptography
- Is fungible (sorry nonfungible tokens, or NFTs, this doesn’t apply to you)
- Is not created or issued by the reporting entity or its related parties
Now that you know what is in scope, what do you think the proposed accounting will be? Well, it might sound familiar…the proposed accounting is that a company would be subsequently required to measure an in-scope crypto asset at fair value (in accordance with ASC 820), with changes in fair value recognized in net income for each reporting period. Sounds similar to equity securities, doesn’t it?
I want to point out that this proposed ASU does not provide guidance on how to initially recognize and measure crypto assets; this proposal only relates to subsequent measurement!
A few other fun little golden nuggets from the proposal include:
- The total (aggregated) amount of crypto assets measured at fair value will be required to be presented separately from other intangible assets on the face of the balance sheet
- Changes in fair value recognized in the income statement will also need to be presented separately from changes in the carrying amount (e.g., impairments and amortization) of other intangible assets
- If a company were to receive crypto as noncash consideration in the ordinary course of business (e.g., as payment for selling a product), and it turns around and sells the crypto asset immediately (i.e., within hours or days) for cash, the cash receipt from that sale must be classified as cash flows from operating activities
There are also a number of proposed disclosures, but you can read the specifics about those in the proposal , which also provides some great background information on why certain decisions were finally made!
So, how do you feel about this proposal? Would you say yes? Let us know in the comments! And if you want to provide your comments directly to the FASB, they are due by June 6, 2023.
Additionally, if you think you’ll need to brush up on the requirements of fair value accounting, we’ve got you covered with our Fair Value collection eLearning series! And if you love crypto as much as we do, check out this podcast episode where we discuss crypto staking services!
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