Enhanced Transparency and Fair Value Measurement on the Horizon for Crypto Asset Accounting

The Financial Accounting Standards Board (FASB) has taken a significant step in addressing some of the significant accounting challenges posed by cryptocurrency. In a recent move, the FASB issued Accounting Standards Update (ASU) 2023-08 Accounting for and Disclosure of Crypto Assets, which aims to enhance the accounting procedures and disclosure requirements for certain crypto assets.

FASB Chair Richard R. Jones emphasized the importance of this initiative, noting that stakeholders from varied sectors have expressed a strong desire for improved crypto asset accounting. The new standard is poised to offer investors and other capital allocators a more transparent view of the economic realities underpinning these crypto assets, as well as a clearer picture of an entity’s financial status.

Until now, the accounting guidance for most use cases, except for certain specialized industries, resulted in entities historically accounting for holdings of crypto assets as indefinite-lived intangible assets, a “cost less impairment” accounting model. The amendments introduced by the ASU changes that, calling for entities to measure qualifying crypto assets at their fair value for each reporting period, with any changes in that value being recognized in net income. This move is designed to reflect these assets’ volatility and market-driven nature more accurately.

Moreover, the ASU seeks to bolster investor insights by mandating disclosures about significant crypto asset holdings, any contractual sale restrictions, and reporting period fluctuations.

To fall under the purview of these amendments, crypto assets must fulfill the following criteria:

• Meet the definition of an intangible asset as defined by FASB
• Do not provide the asset holder with enforceable rights to or claims on underlying goods, services, or other assets
• Are created or reside on a distributed ledger based on blockchain or similar technology
• Are secured through cryptography
• Are fungible
• Are not created or issued by the reporting entity or its related parties.

Entities are expected to comply with the new standards for fiscal years starting after December 15, 2024, covering interim periods within those fiscal years. However, early adoption is permissible for financial statements yet to be issued or made available for issuance. If adopted in an interim period, the changes must be retroactively applied from the start of the fiscal year.

IMPLICATIONS FOR BUSINESSES WITH CRYPTO ASSETS

Businesses holding crypto assets will need to gear up for increased scrutiny and a more meticulous reporting process. The introduction of fair value measurement means that entities must stay abreast of market prices and be prepared to report the impact of price fluctuations on their financial performance.

The requirements for detailed disclosures will compel organizations to maintain comprehensive records of their crypto transactions and holdings. Entities also need to invest in systems capable of tracking and valuing crypto assets in real-time to meet reporting demands.

While the new standard may increase the accounting complexity for businesses with crypto assets, it ultimately aims to provide a clearer financial picture to stakeholders, thereby potentially increasing trust and investment in entities dealing with them.

For further details on the new standards or if you want to discuss how this could affect your business, please get in touch with Marcum’s Digital Assets & Blockchain team.