Herb Chain
Shareholder, Mayer Hoffman McCann. Deputy Technical Director, Global Audit Group, Kreston Global.
Herbert Chain is a highly experienced author is a financial expert with 40 years of experience in business, accounting, and audit, having served as a Senior Audit Partner at Deloitte. He holds certifications from the National Association of Corporate Directors and the Private Directors Association, with knowledge of private company governance and effective risk management. He has extensive knowledge in the financial services sector, including asset management and insurance, and experience with SPACs.
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Crypto assets: Fair value accounting is coming
March 31, 2023
The increasing use and acceptance of crypto-assets have prompted many businesses and investors to reconsider their approach to financial reporting, specifically in the area of fair value accounting. As digital assets become more prevalent, they are changing the way financial holdings are viewed and managed, even though traditional assets such as cash, inventory, and equipment still play an important role in many businesses’ financial statements. Herb Chain, from CBIZ MHM, the Kreston Global US firm, explores the implications of the latest FASB guidance.
As a result, accounting for digital assets has become a critical issue for businesses, investors and other stakeholders, and external auditors. Until very recently, the only U.S. guidance came from the AICPA (American Institute of Certified Public Accountants) through a practice aid that provided nonauthoritative guidance on how to account for digital assets.
Current U.S. Guidance
Under current accounting principles generally accepted in the United States of America (US GAAP), cryptocurrencies are considered intangible assets and are accounted for using the impairment model. This means that they are initially recorded at cost and subsequently tested for impairment if events or circumstances suggest that their value may have declined. Subsequent increases in the carrying amount of the asset and reversal of an impairment loss are prohibited.
On the horizon
On December 15, 2021, in response to feedback received on its June 2021 Invitation to Comment, Agenda Prioritization, FASB added a project to its research agenda to explore accounting for and disclosure of a subset of exchange-traded digital assets and exchange-traded commodities. On February 1, 2023, the FASB Board directed the staff to draft a proposed Accounting Standards Update (ASU).
On March 23, 2023, FASB published a proposed ASU, which would add a new subtopic to the FASB Codification: Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60), Accounting for and Disclosure of Crypto Assets, which is intended to improve the accounting for and disclosure of certain crypto assets. In its press release, FASB said it received feedback that the “accounting for crypto assets as indefinite-lived intangible assets, which is a cost-less-impairment model, does not provide investors with decision-useful information or reflect the underlying economics of those assets.” If adopted, the proposal will provide the first explicit accounting standard on crypto assets in U.S. GAAP.
The proposed standard – briefly
The amendments in the proposed ASU would require an entity to measure certain crypto assets at fair value each reporting period in the statement of financial position each reporting period and recognize changes in fair value in net income. The proposed amendments also would require that an entity provide enhanced disclosures for both annual and interim reporting periods, including presenting crypto assets separately from other intangible assets.
The amendments in the proposed ASU would apply to all entities holding crypto assets that meet all the following criteria:
- Meet the definition of “intangible asset” as defined in the FASB Accounting Standards Codification Master Glossary
- 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 technology
- Are secured through cryptography
- Are fungible
- Are not created or issued by the reporting entity or its related parties.
The amendments in the proposed ASU would require a cumulative-effect adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets) as of the beginning of the annual reporting period in which an entity adopts the proposed amendments. Upon issuance of a final ASU, early adoption would be permitted in any interim or annual period for which an entity’s financial statements have not been issued (or made available for issuance) as of the beginning of the annual reporting period. FASB noted that the Board will determine the effective date after it considers stakeholder’s feedback. Comments are due by June 6, 2023.
It is important to note that the proposed guidance is not yet final and may be subject to change based on feedback from stakeholders. However, it provides insight into how the FASB views accounting for digital assets and may impact future accounting standards in the US relating to other types of digital assets.
What about the rest of the world? – Professional Accounting Standards in Other Countries and Under IFRS
Many countries outside of the United States have developed their own accounting standards for digital assets. For example, the UK’s Financial Reporting Council (FRC) has issued guidance on how to account for cryptocurrencies and tokens. The guidance suggests that cryptocurrencies should be accounted for as intangible assets, and tokens should be accounted for as financial instruments.
Under IFRS (International Financial Reporting Standards), digital assets are accounted for using IAS 38, which provides guidance on how to account for intangible assets. Like current US GAAP, IAS 38 requires that digital assets be initially recorded at cost and subsequently tested for impairment if events or circumstances suggest that their value may have declined.
However, IFRS also provides guidance on how to account for digital assets using the fair value model. IFRS 13 requires that entities measure the fair value of digital assets based on market prices, if available. If market prices are not available, entities must use other valuation techniques, such as discounted cash flows or comparable transactions.
Where do we go from here?
Accounting for crypto assets is a complex and rapidly evolving issue that requires careful consideration. The AICPA practice aid, professional accounting standards for other countries, and IFRS provide guidance on how to account for digital assets, while the FASB’s recent proposal offers insight into potential changes to US GAAP. It is important to stay current with developments in accounting standards and to carefully consider the implications of different accounting models for crypto and other digital assets.
If you have any questions on crypto-assets, please get in touch.
