Bloomberg reports a significant shift in accounting practices on the horizon for companies holding cryptocurrencies such as Bitcoin or Ethereum. The Financial Accounting Standards Board (FASB) has introduced its first set of rules for crypto accounting. Under these new regulations, companies are required to record their cryptocurrency holdings at fair value, aiming to reflect the most current value of these assets.
The Financial Accounting Standards Board (FASB) is an independent, private-sector organization based in the United States. It’s primarily responsible for establishing and improving financial accounting and reporting standards for the guidance and education of the public, including issuers, auditors, and users of financial information. FASB sets standards intended to ensure that financial reporting provides clear, consistent, and useful information to investors and other users.
FASB’s guidelines, known as Generally Accepted Accounting Principles (GAAP), are the foundation for financial accounting policies and practices in the U.S. These standards are designed to enhance the transparency, comparability, and integrity of financial reporting, thereby aiding investors and others in making informed economic decisions.
While FASB standards are specific to the U.S., the principles can influence accounting practices in other countries.
The change in accounting rules, according to Bloomberg, is expected to capture the volatile nature of cryptocurrency values, which can fluctuate dramatically. This volatility often leads to companies reducing the value of their holdings, subsequently impacting their earnings. Bloomberg states that the new rules will be applicable to both public and private companies for fiscal years commencing after December 15, 2024, aligning with the 2025 calendar year for most companies. However, firms can adopt these rules earlier if they choose.
Edward McGee, CFO of Grayscale Investments LLC, expressed enthusiasm for these changes, likening them to a “holiday gift” of sensible accounting, Bloomberg reports. Grayscale Investments has been engaged in efforts to establish a spot Bitcoin exchange-traded fund (ETF) amidst regulatory challenges in the United States.
Historically, Bloomberg highlights, there has been a lack of specific U.S. accounting guidelines for digital currencies. In the absence of formal rules, companies resorted to treating cryptocurrencies as intangible assets, a category that includes trademarks and copyrights, as per Bloomberg. This approach mandated that companies record their crypto assets at the purchase price and only acknowledge gains upon selling these assets at a profit.
Bloomberg’s article points out that the introduction of these rules follows years of resistance from FASB, despite repeated requests from the crypto industry since 2017. The landscape began to shift as companies like MicroStrategy Inc. and Tesla Inc. started investing in Bitcoin, prompting a reevaluation of the need for specific crypto accounting standards.
Bloomberg notes that the scope of the new rules is deliberately narrow, excluding non-fungible tokens (NFTs), stablecoins, issuer-created tokens, and wrapped tokens. FASB members, however, have indicated a willingness to address additional crypto-related issues in the future if they become more prevalent in business practices.
The crypto industry, including CFOs like Salman Khan of Marathon Digital, views these changes positively. Bloomberg says that they believe formal accounting standards could boost crypto adoption by increasing investor confidence and legitimizing the sector.
Bloomberg mentions that under the new guidelines, companies must report their crypto assets separately on balance sheets and provide detailed disclosures in their footnotes for every reporting period. This includes outlining significant crypto holdings and any restrictions on these assets. Annually, companies are required to reconcile changes in the opening and closing balances of their crypto assets, categorized accordingly.
Determining the fair value of cryptocurrencies, as per the ASC 820 accounting rules, can present challenges, notes PJ Theisen, a partner at Deloitte & Touche LLP, as reported by Bloomberg. Theisen points out that while the concept seems straightforward, the actual process of valuing certain types of cryptocurrencies can be complex.
According to FASB’s press release about this Accounting Standards Update (ASU), FASB Chair Richard R. Jones had this to say:
“The new standard responds to feedback from stakeholders of all backgrounds who indicated that improving the accounting for and disclosure of crypto assets should be a top priority for the Board. It will provide investors and other capital allocators with more relevant information that better reflects the underlying economics of certain crypto assets and an entity’s financial position while reducing cost and complexity associated with applying current accounting.”
The press release went on to say:
“The amendments in the ASU improve the accounting for certain crypto assets by requiring an entity to measure those crypto assets at fair value each reporting period with changes in fair value recognized in net income. The amendments also improve the information provided to investors about an entity’s crypto asset holdings by requiring disclosure about significant holdings, contractual sale restrictions, and changes during the reporting period.“
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