The Financial Accounting Standards Board (FASB) tentatively decided at its Oct. 12 meeting to require crypto assets that are in scope to be measured at fair value. The requirement would apply to both public and private companies.
FASB added a project on accounting for digital assets to its technical agenda in May. In August, it decided to limit the scope of the project to fungible digital assets accounted for as intangible assets under current U.S. generally accepted accounting principles (GAAP). The board changed the project’s name to “Accounting for and Disclosure of Crypto Assets” and decided it would apply to all entities, including broker-dealers and investment companies that apply industry-specific GAAP.
The board received input from more than 400 commenters supporting fair value measurement in its invitation to comment.
“It’s important to understand this group of digital assets is the one where there was a strong consensus U.S. GAAP was resulting in accounting information that was not useful,” said Scott Muir, a partner in KPMG’s Department of Professional Practice. “There is likely almost universal agreement FASB is on the right path in measuring these assets at fair value, and that this would be an improvement to existing GAAP. Determining the project scope appears to be the toughest decision FASB has to make.”
“FASB tried to address what they believe they heard about the assets most in need of guidance, in order to reach a quick decision and avoid scope creep that can slow down projects,” said Stephen McKinney, managing director at the national office of Deloitte. “They understood some assets would fall out of scope, and they did not want to recreate the wheel for assets where there is existing accounting guidance.”
Crypto assets in scope will be measured at fair value—in accordance with Accounting Standards Codification (ASC) Topic 820, Fair Value Measurement—and gains and losses from changes in their fair value will be recorded in comprehensive income each period. There is no exception to apply an alternative measurement, like measurement at historical cost less impairment, for crypto assets that do not have quoted prices in active markets.
“While it may be more difficult to obtain fair value for some crypto assets that do not trade actively than for others, ASC 820 is at least a known commodity as it has been around for quite a while,” Muir said.
Any costs incurred to acquire crypto assets, including transaction fees or commissions, would be expensed as incurred. If other industry-specific guidance exists under U.S. GAAP for accounting for these costs, as it does for investment companies (ASC 946) and broker-dealers (ASC 940), that guidance would continue to be applied.
Currently, there is no existing guidance in U.S. GAAP on accounting for these assets. As a result, they are accounted for as indefinite-lived intangible assets under ASC 350, which requires measurement at historical cost with assessment of any impairment. The proposed fair value accounting is intended to address concerns the present accounting model does not represent the economics of crypto asset transactions whose values fluctuate widely and often.
In addition, there are challenges for practitioners in applying the impairment model requirements to crypto assets.
“Today, companies must monitor for impairment constantly, even daily, in order to determine the asset’s lowest observable fair value at any point within a reporting period,” McKinney said. “The proposed accounting would require determination of fair value at the end of the reporting period.”
Assets in scope
There are five criteria digital assets must meet to be included in the project’s scope. They must:
- Meet the definition of an intangible asset under U.S. GAAP;
- Not provide the holder of the digital asset with enforceable rights to, or claims on, underlying goods, services, or other assets;
- Reside on a distributed ledger, like a blockchain;
- Be secured through cryptography; and
- Be fungible.
“It appears FASB intends to capture crypto assets like Bitcoin, Ether, and Litecoin,” Muir said.
Not included in the scope are nonfungible tokens (NFTs), many stablecoins, and crypto assets that meet the U.S. GAAP definition of a security. FASB also excluded commodities from the scope of the project at the present time, but it will continue to consider accounting for commodities as part of its research agenda and could add the topic to its technical agenda in the future.
“Most NFTs would fail the scoping criteria because they are not fungible and give rise to other rights and obligations for the holder,” said Muir.
McKinney noted, “FASB indicated the population of NFTs is small compared with all digital assets, and the board was attempting to solve the accounting issue for the largest part of the population.”
Entities in scope
There would not be any difference in applying fair value to crypto assets in scope between private companies and public companies.
“Investment companies and broker-dealers already measure these assets at fair value and account for related commissions and other costs, so it appears FASB was not looking to change what they do,” Muir said.
“Whenever a project is at this stage, practitioners should continue to monitor it and stand ready to provide comments and other feedback to the board,” Muir recommended. Until the standard is finalized, companies other than investment companies and broker-dealers should continue to account for their crypto assets at historical cost less impairment.
The decision is still tentative, so it will follow FASB’s usual standard-setting due process before it is finalized.
“After making all decisions on the project, FASB will issue a proposed [accounting standards update], expose it for public comment, assess the feedback, and then vote on it before issuing a final proposal,” McKinney said. The board will continue to discuss and deliberate the accounting at future meetings, including how to recognize and derecognize, financial statement presentation, disclosures related to crypto assets in scope, and transition.
“The timing of FASB’s future decisions on this project is not known at this time,” said McKinney, “but given the board’s willingness to respond quickly to feedback received from the invitation to comment, it could be quicker than for other projects.”
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