Attention companies…are you up to speed on the new accounting and disclosure rules for crypto assets? The Financial Accounting Standards Board has issued an Accounting Standards Update (ASU) on these rules. Here’s what you need to know.

What counts as a crypto asset?

A digital or crypto asset is any piece of content stored digitally. This includes photos, videos, files containing text, spreadsheets, graphics, PDFs and cryptocurrency such as Bitcoin and Ethereum..

What were the previous rules?

There was no true authoritative guidance. Finally in 2019, the AICPA issued a practice aid (non-authoritative) that recommended accounting for these assets as indefinite lived intangible assets measured at historical cost less impairment, unless the entity was within the scope of the investment-company guidance in ASC 946 or was a certain type of broker-dealer. Once impairment was recognized, the adjusted carrying value became the new cost basis. No reversal of the loss was permitted, even if the loss was temporary and the value recovered.

Why were new rules proposed?

Business owners have expressed concerns that this traditional intangible asset model fails to fully represent the underlying economics of crypto assets. Additionally, stakeholders have voiced concerns that the current model requires entities to use a crypto asset’s lowest observable fair value, making it complicated to recognize impairments.

What are the proposed rules?

In hopes of alleviating these concerns, the FASB has issued ASU 2023-08 which requires an entity to subsequently measure certain crypto assets at fair value (in other words, the price the company would receive if they sold the crypto asset).

Additionally, under the new rules, there are six criteria that the crypto assets must meet:

1. Must meet the definition of an intangible asset under GAAP
2. Must be fungible – non-fungible tokens (NFTs) centered around collectibles would not qualify
3. Must reside on a distributed ledger based on blockchain technology
4. Must be secured by cryptography
5. Must not be created or issued by the reporting entity or its related parties
6. The crypto holder must not have enforceable rights to or claims on underlying goods, services or other assets

Crypto assets will need to be presented separately from other intangible assets on the balance sheet (same with presenting separately any changes in fair value in the income statement). The changes apply to both public and private companies, including employee benefit plans and non-profits.

What are the benefits of the rules?

• More accuracy: It is widely viewed that companies will be able to reflect the value of these crypto holdings more accurately within their financials by reporting them at fair value. Under the new guidance, companies record in income unrealized gains on highly liquid digital assets when the appreciation occurs (rather than waiting for a realized disposition, as is required under the current guidance). Of course unrealized losses are also recorded if applicable.
• Less complexity: Such accounting treatment resembles the mark-to-market model used for traded securities. Because of this similarity to traditional investment holdings, this may ease the concerns of financial institutions and institutional investors worried about accounting complexities under the old method. This straightforward treatment also eliminates the need for continuous impairment testing.

Crypto assets received/disbursed in exchange for goods or services with a customer/vendor in the ordinary course of business was previously considered to be a non-cash transaction because crypto assets are not cash. Under the new rules, if the company converts the crypto nearly immediately into cash (i.e., within a few hours or days), then the resultant cash received is an operating activity.

When is this effective and what should my company do to prepare?

The new standard takes effect for all entities for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted by applying the entire ASU, including the presentation and disclosure provisions, not just the measurement guidance. Upon adoption, the new standard is applied using a modified retrospective transition method with a cumulative-effect adjustment recorded to the opening balance of retained earnings or net assets as of the beginning of the fiscal year of adoption. Retrospective restatement is not required or allowed for prior periods.

Entities adopting the new ASU should calculate the opening balance cumulative-effect adjustment, consider the potential tax effects if any on book/tax reporting and gather the necessary additional information for the presentation and disclosures required by the standard.

Questions about the standard? Contact us.