October 20, 2022

FASB Recommends New Cryptocurrency Accounting Method with Significant Impact on Corporate Reporting

By Robert Graham, National Leader - Digital Assets & Blockchain

FASB Recommends New Cryptocurrency Accounting Method with Significant Impact on Corporate Reporting Digital Assets & Blockchain

On October 12, 2022, the Financial Accounting Standards Board (FASB or the Board) tentatively recommended that companies report certain crypto assets and digital currencies at fair value. The announcement is welcome news to many within the digital asset industry who have been advocating for just such a change. Supporters say that, as a result of this move, companies will be able to more accurately reflect the value of cryptocurrency holdings within their financial reports.

Companies that weren’t subject to guidance under Accounting Standards Committee (ASC) 946 for investment companies or ASC 940 for broker dealers who held cryptocurrencies have typically recorded them as indefinite-lived intangible assets. That approach required holders to record impairment charges when the value of cryptocurrency holdings fell below their purchase price with no ability to subsequently adjust those assets if the price increased.

Instead, FASB’s recent recommendation is that certain cryptocurrency assets be recorded at fair value using the guidance in ASC 820, Fair Value Measurement. These changes are intended to better reflect the fair value of cryptocurrency holdings on a corporate balance sheet or financial statement, contributing to a more accurate picture of the reporting company’s financial standing.

Industry Impact

While not yet official guidance, this recommendation signals how the Board expects to address cryptocurrency accounting and follows an announcement in May 2022 that crypto will be a subject of focus going forward.

Even in the short term, this recommendation may prove a boon to the cryptocurrency industry as advocates for the change have long suggested that adopting the fair-value accounting method will enable crypto holdings to be accurately valued on corporate balance sheets. The existing impairment requirement will be phased out so an asset won’t have to be recorded at its lowest ever post-purchase value.

Additionally, there is some suggestion that, because the fair value measurement is familiar to companies holding traditional financial assets, the change may ease the concerns of crypto-curious institutional investors wary of the accounting headaches accompanying crypto purchases subject to the prior method.

The Board also considered if there should be a difference, or measurement alternative, for private companies. The Board ultimately decided that the measurement and recognition of crypto assets should remain the same regardless of if the reporting entity is a private company or a public business entity.

Remaining Questions

The FASB’s recommendation only applies to cryptocurrency assets that meet a certain criteria, including those:

  • That meet the definition of “intangible assets;”
  • Residing or created on a distributed ledger; and
  • That are fungible.

These criteria suggests that most cryptocurrencies will be eligible for fair-value measurement, while tokenized equities, NFTs, and certain other assets backed by claims on tangible goods or services will not be affected by the FASB’s recent guidance.

The Board will also consider presentation and disclosure, as well as transition, at a future meeting.

What’s Next

Until the FASB issues an Accounting Standard Update codifying this change it will not be officially adopted as the appropriate treatment for cryptocurrencies. Before that can happen, the FASB will likely hold meetings addressing the proposed change, issue recommendations on the adoption of and transition to the new standard, release a proposed draft and invite public comment, and conduct a vote concerning the proposed update.

Stay tuned. Marcum will issue additional updates as the circumstances surrounding the FASB’s proposed change to accounting for cryptocurrencies develops.