In a world where digital assets and cryptocurrencies have gained unprecedented prominence, the Financial Accounting Standards Board (FASB) has embarked on a mission to enhance the accounting and disclosure standards for crypto assets.
This project, formerly known as “Accounting for and Disclosure of Digital Assets,” now referred to as “Accounting for and Disclosure of Crypto Assets,” seeks to provide a comprehensive framework that addresses the unique challenges presented by these emerging financial instruments.
In this article, we explore the key decisions reached at the latest FASB meeting on September 6, 2023, regarding this project.
Overview of FASB
Established in 1973, the Financial Accounting Standards Board (FASB) is the independent, private-sector, not-for-profit organization based in Norwalk, Connecticut, that establishes financial accounting and reporting standards for public and private companies and not-for-profit organizations that follow Generally Accepted Accounting Principles (GAAP).
The FASB is recognized by the U.S. Securities and Exchange Commission as the designated accounting standard setter for public companies. FASB standards are recognized as authoritative by many other organizations, including state Boards of Accountancy and the American Institute of CPAs (AICPA). The FASB develops and issues financial accounting standards through a transparent and inclusive process intended to promote financial reporting that provides useful information to investors and others who use financial reports.
The FASB’s dedication to setting accounting standards ensures the integrity and consistency of financial reporting in the United States, benefiting investors, businesses, and the financial community. Through its rigorous and transparent processes, it continues to adapt to the ever-evolving financial landscape, as evidenced by its recent project on “Accounting for and Disclosure of Crypto Assets.” This initiative underlines the FASB’s commitment to providing accurate and relevant accounting guidance in a dynamic financial world.
Project Background
The journey to create a dedicated framework for crypto asset accounting and disclosure began with the FASB’s response to feedback received in June 2021. FASB Chair Rich Jones added the project to the Board’s research agenda, recognizing the need to address the complexities surrounding the accounting of exchange-traded digital assets and commodities. On March 23, 2023, the FASB issued the Proposed Accounting Standards Update, Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets, marking a significant milestone in this initiative. The due date for comment letters is June 6, 2023.
Scope
One of the primary objectives of the FASB is to define the scope of the proposed standards. The Board has established criteria to determine which crypto assets will fall under the scope of this framework:
- They must meet the definition of intangible assets as defined in the Codification Master Glossary.
- They should not provide the asset holder with enforceable rights to, or claims on, underlying goods, services, or other assets.
- They must be created or reside on a distributed ledger based on blockchain technology or a technology similar to blockchain.
- They should be secured through cryptography.
- They must be fungible.
- They should not be created or issued by the reporting entity or its related parties.
Additionally, the Board has made a notable adjustment, expanding criterion (c) to include assets that are created or reside on a distributed ledger based on technology similar to blockchain. This amendment reflects the dynamic nature of technological advancements in this field.
Measurement
The FASB has affirmed that entities should measure crypto assets within the defined scope at fair value, in accordance with Topic 820, Fair Value Measurement. However, the Board has opted not to provide specific guidance on recognizing costs related to acquiring crypto assets, such as commissions and transaction fees. This approach maintains consistency with existing fair value measurement standards while allowing flexibility for the dynamic nature of the crypto market.
Presentation
Clear presentation guidelines are essential for financial reporting. The FASB has outlined key requirements for presenting crypto assets within the scope:
- Crypto assets must be presented separately from other intangible assets that are measured using different measurement bases.
- Gains and losses on crypto assets should be presented separately in the income statement, distinct from the effects of other intangible assets, such as amortization or impairments.
- If a not-for-profit organization nearly immediately liquidates crypto assets received with donor-imposed restrictions for long-term or capital use, this activity must be classified as cash flows from financing activities.
On the other hand, the Board has opted not to provide additional guidance on classifying crypto assets as current or noncurrent assets in a classified balance sheet or on the presentation of gains and losses from crypto assets in the income statement.
Disclosure
Transparent disclosure of crypto assets is crucial for stakeholders to make informed decisions. The FASB has outlined comprehensive disclosure requirements, which include:
- At both annual and interim periods, entities must disclose information about significant crypto asset holdings, such as the name of the crypto asset, fair value, units held, and cost basis. Furthermore, the fair value and cost basis of other crypto asset holdings, which may be aggregated into a single line item, should be disclosed.
- At both interim and annual periods, entities should reveal the fair value of crypto assets that are restricted from sale, the nature of restrictions, the remaining duration of restrictions, and circumstances that could cause these restrictions to lapse.
- At annual periods, entities should provide a reconciliation, as described in the proposed guidelines. Notably, the activity related to crypto assets received as noncash consideration, converted almost immediately into cash, is exempt from this disclosure.
The FASB has made the decision not to introduce additional disclosure requirements beyond those outlined in the proposed standards.
Transition
Entities adopting the new standards will be required to make a cumulative-effect adjustment to the opening balance of retained earnings or other appropriate components of equity or net assets at the beginning of the annual period in which the guidance is adopted.
Effective Date and Early Adoption
The FASB has established an effective date of December 15, 2024, for fiscal years beginning after that date, including interim periods within those fiscal years. Furthermore, entities will have the flexibility to adopt these standards early.
Cost-Benefit Analysis
The FASB has conducted a thorough cost-benefit analysis and has determined that the expected benefits of these amendments justify the expected costs. The standards are expected to enhance transparency and consistency in accounting for crypto assets, thereby providing substantial benefits to users of financial statements.
Conclusion
The FASB’s initiative to develop a comprehensive framework for accounting and disclosure of crypto assets reflects the growing importance of digital assets in the financial world. The decisions reached at the latest meeting on September 6, 2023, mark significant progress in this endeavor. As the due date for comment letters approaches, stakeholders eagerly await the finalization of these standards, which will play a pivotal role in shaping the future of financial reporting for crypto assets. This project exemplifies the FASB’s commitment to adapting to evolving financial landscapes and ensuring the relevancy and reliability of financial statements.
