What to consider as FASB tackles digital assets

The tentative decision was a change from FASB’s October 2020 determination that the issue did not meet its agenda criteria because it was not pervasive at the time.

“The landscape today is very different from what it was in October 2020,” said Amy Park, U.S. audit and assurance partner and blockchain and digital assets leader at Deloitte. “By the end of 2020 and early 2021, more companies started considering bitcoin and other digital asset investments, and prices were going through the roof.”

“They added the project because there was no longer a question of pervasiveness,” she said.

In a 2021 invitation to comment on its standard-setting agenda, FASB received feedback about the challenges of the current accounting model for digital assets, Park said. Respondents identified digital assets more than any other item as a topic where accounting guidance was needed (445 out of 522), and there was substantial support for a change to account for digital assets at fair value (309 out of 445).

Many respondents said the current accounting model does not reflect the economics of the assets in their volatile markets or provide users with relevant information for decision-making. They called for use of a fair-value model, which would result in digital assets with a readily determinable fair value being measured at fair value on a recurring basis, with realized and unrealized gains and losses recognized in earnings each period.

Current accounting model

Because there are no specific U.S. generally accepted accounting principles (GAAP) for cryptocurrency assets today, holders of these assets generally account for them as indefinite-lived intangible assets under Accounting Standards Codification Topic 350 (Intangibles—Goodwill and Other). Under that model, the asset is initially recorded at cost and is not amortized. It is tested for impairment annually, unless there are events or changes in circumstances that indicate it is more likely than not the asset’s fair value is less than its carrying amount at an earlier date.

“Many would argue a fair-value model would be more economically reflective of a company’s financial position at any point in time for investors and analysts.”

Scott Muir, Partner, KPMG

If impaired, the asset would be written down to the lowest observable fair value in a reporting period as an operating loss on the income statement. Once impairment is recorded, it cannot be reversed, even if the asset’s fair value goes back up in the same or a subsequent reporting period, which is problematic because of the significant volatility in values of these assets.

“The current model results in an odd outcome: assets are written down only when the fair value decreases below the carrying value, but fair value increases are not recognized,” said Scott Muir, a partner in KPMG’s Department of Professional Practice. “Many would argue a fair-value model would be more economically reflective of a company’s financial position at any point in time for investors and analysts.”

“Companies holding the same amount of bitcoin bought at different cost bases could sell it on the same exchange at the same price but could have very different amounts reflected on their financial statements,” Park said. “This raises concerns about this financial reporting outcome, whether it is meaningful or potentially misleading, and may not be comparable.”

The American Institute of Certified Public Accountants’ Digital Assets Working Group, of which Park is a member, issued a practice aid that provides nonauthoritative guidance, states crypto assets would generally be accounted for under ASC Topic 350, and supplies questions and answers on how to apply ASC Topic 820 fair-value guidance to digital assets.

Broker-dealers and investment companies apply industry-specific GAAP to digital assets today, which provides for a fair-value model, and they do not account for them as intangible assets.

Potential changes in accounting

“The board is considering moving to a fair-value measurement model, which would capture both the downs and the ups going forward,” Muir said. “A number of board members suggested they were inclined to make this a requirement rather than an option; however, that is something that will be discussed.”

It is unclear at this stage whether FASB would decide to apply existing fair-value guidance in ASC Topic 820 to digital assets or would create a new specific accounting standard.

“Because companies use Topic 820 fair values for impairment accounting today, they likely have some measure of the processes and controls in place they will need to capture both the ups and downs in fair values if that is the way FASB goes forward,” Muir said. “If FASB created a new or adjusted fair-value model for digital assets, it would likely result in some companies having to start from scratch.”

“A number of board members provided support for a fair-value model, although this was not voted on at the FASB meeting,” Park said. “Based on board discussions, it would seem odd if they came up with a completely different model from Topic 820.”

Park noted regardless of what fair-value model FASB decides on, there will be challenges in practice for companies to work through, just as there are for Topic 820. There will also be unique issues because of the different nature of and markets for these assets.

IASB decision

In April, the International Accounting Standards Board (IASB) decided it would not add a project on accounting for cryptocurrencies to its agenda. The IASB said such work would be “complex and maybe premature” because of rapid changes in the ecosystem for cryptocurrencies.

The IASB did vote to add a project on intangible assets to its research pipeline that could potentially address cryptocurrencies.

“Depending on which way FASB goes with its project, diversity between U.S. and international accounting standards for digital assets could potentially increase or decrease,” Muir said. He noted there has always been some diversity because of existing differences in accounting guidance that applies to digital assets between the two.

Next steps for FASB

FASB Chairman Richard Jones acknowledged the organization needs to determine and narrow the scope of the digital assets project because it is a broad topic. FASB staff will continue to seek input from stakeholders on scope, and the board will deliberate further in future meetings.

“FASB simply launched a project, but we don’t know what they will decide,” Muir noted.

There are open questions and potential alternatives to be determined, including the types of digital assets that will be in scope and whether entities in certain industries would be excluded.

“The (FASB) board members acknowledged defining scope is an important issue. The larger the scope, the longer the project will take, and they acknowledged the need for quick change.”

Amy Park, Audit and Assurance Partner, Deloitte

“They may intend to focus on those digital assets often referred to as ‘cryptocurrencies,’ like bitcoin or ether, that are currently subject to a model of only measuring value decreases and seem less likely to take on the accounting for other digital assets like non-fungible tokens (NFTs), utility tokens, or stable coins that qualify as financial assets,” Muir said.

“The board members acknowledged defining scope is an important issue,” said Park. “The larger the scope, the longer the project will take, and they acknowledged the need for quick change.”

FASB decided at the May meeting to exclude commodities from the scope of the digital assets project because it did not want to slow down the project’s progress. The board indicated it would keep commodities on its research agenda for future consideration.

There are questions about where to classify and how to present the related amounts on the income statement, along with what disclosures will be required. “The final project will include both recognition and measurement, as well as presentation and disclosure,” Park said. “FASB will have to make decisions about what information is useful and whether current disclosure requirements in ASC Topic 820 are sufficient or if there is other information that should be included.”

What practitioners should do now

Both Muir and Park recommend companies that hold digital assets now or are interested in them should monitor what FASB is doing; participate in stakeholder outreach; and be ready, with the help of advisers, to comment on the proposal and prepare for the changes.

“This project is still in the early stages, so it is too early for companies to make significant investments to change their processes, systems, or controls,” Muir said.

Park noted although there are challenges with applying the existing accounting model for digital assets, companies cannot change their current accounting and must continue to apply that model until a final accounting standards update is issued. In practice, many companies she works with that account for digital assets using an intangible asset model today have records under a fair-value model for management reporting.

“Companies I talk to are hopeful and think this is a positive change,” Park said. She noted there will be a proposed accounting standard with a comment period for FASB to ask for feedback, including potential cost/benefit and whether the proposed amendments represent an improvement and provide relief from current challenges.

“I encourage my clients to be part of the change and the standard-setting process,” she said. “FASB’s standard-setting process is largely dependent on the information it receives.”