On March 23, 2023, FASB issued a fast-tracked exposure draft on accounting for certain crypto assets. As the crypto market has grown exponentially, companies, investors, and analysts all sought additional guidance in the accounting and reporting for this volatile new asset class. This proposal would require fair value accounting and increased disclosures for entities holding certain crypto assets. While the proposal is more narrowly scoped than some had hoped, it represents a significant milestone in providing more decision-useful information to financial statement users.
Comments are due by June 6, 2023.
Background
When FASB sought feedback on its future standard setting in 2021, the board was inundated with responses seeking clarity on crypto accounting and reporting. There is a diversity in practice related to accounting and presentation of digital asset holdings, including the amounts of digital assets held, current fair value, and historical cost. Nonauthoritative guidance from the American Institute of CPAs says companies should classify crypto as an intangible asset, as outlined in Accounting Standards Codification (ASC) 350, Intangibles—Goodwill and Other. Under this guidance, entities record intangible assets at historical cost and test for impairment annually and more frequently if events or circumstances indicate that it is more likely than not that an asset is impaired. Digital assets recorded are not adjusted for changes in fair value, except for accounting for impairment when fair value is less than historical cost.
Scope
The proposal would apply to all entities holding certain crypto assets. Covered crypto assets must meet the following criteria:
- Meet the intangible asset definition in the Codification Master Glossary.1 This definition specifically excludes financial assets, which would exclude fiat currencies and many securities that would continue to be accounted for under existing GAAP. There are multiple definitions of “security” and certain assets may be considered securities for regulatory purposes but may not be considered a security under FASB’s Master Glossary.
- Do not provide the asset holder with enforceable rights to, or claims on, underlying goods, services, or other assets. This clause was included to ensure that items like contracts with customers, guarantees, and insurance contracts would continue to be existing GAAP. This clause scopes out wrapped tokens and other similar crypto assets from this proposed ASU.
- Are created or reside on a distributed ledger or blockchain. This clause prevents other digital intangible assets, such as software and media, from being included in the proposal’s scope.
- Are secured through cryptography. This clause prevents other digital intangible assets, such as software and media, from being included in the proposal’s scope.
- Are fungible. This clause excludes nonfungible tokens from the proposal’s scope due to concerns about the potential ability to obtain market prices for nonfungible assets.
- Are not created or issued by the reporting entity or its related parties. A miner is not the creator of the newly created crypto assets it receives as consideration for performing services if that is the only involvement that the miner has in the “creation” of the crypto asset.
Measurement
An entity would account for transaction costs to acquire a crypto asset, such as commissions and other related transaction fees, as expenses when incurred unless the entity is required or permitted to capitalize those costs in accordance with other Topics.
Crypto assets would be measured at fair value under ASC 820, Fair Value Measurement, with any changes in fair value reported in comprehensive income each reporting period.
While the proposal addresses the accounting for transaction costs to acquire crypto assets, it does not address other aspects of the initial measurement and the recognition and derecognition of crypto assets. Reporting entities would account for initial measurement (other than crypto acquisition transaction costs) and recognition and derecognition of crypto assets in accordance with other GAAP.
Presentation
Fair value changes in crypto assets would be included in net income and presented separately from the effects of changes in other intangible assets, such as amortization or impairments.
In-scope crypto assets should be presented separately from other intangible assets in the statement of financial position. An entity can present crypto assets on a more disaggregated basis, e.g., by individual crypto asset holding or intangible asset class.
The proposal does change the presentation requirements for the statement of cash flows. If crypto assets are received as noncash consideration in the ordinary course of business, e.g., in exchange for the transfer of goods and services to a customer, and are converted nearly immediately2 into cash, an entity would be required to classify those cash receipts as cash flows from operating activities.
Disclosure
For annual and interim reporting periods, an entity would be required to disclose the following information:
- The name, cost basis, fair value, and number of units for each significant crypto asset holding and the aggregate fair values and cost bases of the crypto asset holdings that are not individually significant
- For crypto assets subject to restriction(s), the fair value of those crypto assets, the nature and remaining duration of the restriction(s), and the circumstances that could cause the restriction(s) to lapse. In determining the disclosure related to restrictions, an entity should consider the following:
- The level of detail necessary to satisfy the required disclosures
- How much emphasis to place on each of the required disclosures
- Level of aggregation or disaggregation
- Whether users of financial statements need additional information to evaluate the quantitative information disclosed
For annual reporting periods, an entity would be required to disclose the following information:
- A rollforward, in the aggregate, of activity in the reporting period for crypto asset holdings, including additions (with a description of the activities that resulted in the additions), dispositions, gains, and losses. If gains and losses are not presented separately, the entity is required to disclose the income statement line item in which those gains and losses are recognized
- For any dispositions of crypto assets in the reporting period, the difference between the sale price and the cost basis and a description of the activities that resulted in the dispositions
- The method for determining the cost basis of crypto assets, e.g., first-in, first-out, specific identification, or other method
Because the proposal’s scope applies to all entities, investment companies that already fair value crypto assets also would be subject to these new disclosures. Investment companies would continue to present amounts related to crypto assets in their financial statements in accordance with ASC 946.
Transition & Effective Date
If approved, entities would report a cumulative-effect adjustment to the opening balance of retained earnings as of the beginning of the annual reporting period in which the changes are adopted. An effective date will be determined after review of comment letter feedback, but early adoption will be permitted.
Conclusion
FORVIS will continue to follow developments on this issue. FORVIS encourages you to review and provide comments on this proposal by June 6, 2023. For more information, reach out to a professional at FORVIS or submit the Contact Us form below.