The Financial Accounting Standards Board passed its new standard on the measurement and disclosure of cryptocurrencies, something that accounting professionals in this space said has been a long time in coming and that they hailed as a generally positive first step.
The board approved the standard on Sept. 6 after it released an exposure draft in March, which itself came after a decision to narrow the scope of its earlier digital assets project to focus on cryptocurrency such as bitcoin rather than a broader set of assets like nonfungible tokens (see story). The new standard, consequently, does not include these digital assets in its scope, nor does it include wrapped tokens (tokens that derive their value from other assets) and governance tokens (tokens that give someone a right to influence the protocol, similar to voting stock).
Among the more significant changes brought on by this new standard is that cryptocurrency assets will be accounted for at fair value, with changes recognized in net income each reporting period. These assets will be measured separately from other intangible assets in the balance sheet, and changes in the fair value measure of crypto assets, similarly, will be done separately from changes in the carrying amounts of other intangible assets in the income statement.
This is the first time FASB has delved into the world of digital assets, something that Mike Andrusko, managing director and digital assets practice leader at Centri Business Consulting, said people have spent years calling for.
“I would definitely say it’s about time,” he said.
Patrick Camuso, the head of digital asset accounting firm Camuso CPA, said that the new standard will provide extra clarity to cryptocurrency holdings that he felt will better reflect the economic substance of the transactions involving them. This, in turn, might provide more comfort to investors who may have been on the fence about cryptocurrencies before.
“The new standard will require companies to measure crypto assets at fair value, which means that they will have to recognize gains and losses. This will make it easier for investors to understand the true value of a company’s crypto holdings since it allows companies to represent their true financial position on their balance sheet. I’m hopeful that this will help lead to more companies holding digital assets. The new standard will also require companies to provide more disclosures about their crypto assets. This will give investors a better understanding of the risks and underlying nature associated with these assets,” he said.
Sean Stein Smith, a CPA, a Lehman College professor and a strategic advisor for the Central Bank Digital Currency Think Tank, made a similar point, saying that the accounting model is more transparent, relevant and economically important versus lumping crypto assets with other intangibles.
“This is an excellent first step toward developing more comprehensive crypto-specific accounting standards. Industry groups have been advocating for authoritative and crypto-specific standards for years, so it is good to see that these requests — and market realities — are being recognized and partially addressed. This news is worthy of celebration, is a great first step, but hopefully is just the first step of many more to come,” he said.
Andrusko added that the new standard will likely make things a little easier for accounting professionals as well. The previous cost minus impairment model was, he said, very time-consuming, and was made more so by a reliance on manual processes. This was because, he said, there wasn’t a lot of software that could effectively automate this process, versus calculating fair value.
“I think one opportunity this brings to light is there’s software out there that makes this a lot easier to track and not having to have a separate subledger to track impairment makes it a lot easier. … It would allow a more automated process,” he said.
Vendors ready to go
Andrusko is not the only one thinking of the technology implications. Several software vendors that specialize in cryptocurrency tax and accounting are reporting that their solutions are now compatible with the new FASB standards.
Pat White, the CEO of Bitwave — an enterprise digital asset finance platform designed specifically for businesses to manage cryptocurrency tax, accounting, and compliance — noted that his own solution has supported fair value cost averaging since around 2018, and has tried to account for the myriad ways people have used to manage their cryptocurrency assets over the years, including this one. The main thing that needed additional support was in disaggregating cryptocurrencies from NFTs, wrapped tokens and governance tokens, which were not in the scope of the new standard. White said Bitwave had plenty of time to make these changes, though: “We’ve had a good preview of it, [since] the FASB guidance has been in the works since March.”
“Where you end up for Bitwave … in your day-to-day accounting you need to have a simultaneous handling of fair value for bitcoin, Ethereum or Dash and then impairment for others, so that is the part we had to put a lot of time into. The other part is we put time into multibook support. So everyone who uses Bitwave as a tax book and an accounting book, they’re keeping historical cost basis but also fair value for GAAP purposes. So we have a full solution allowing you to very easily track both those at the same time,” he said.
Aaron Jacob, vice president of enterprise accounting at digital asset tax and information reporting platform TaxBit, similarly said their solution already works with the new FASB standard. Like White, Jacob noted that TaxBit has already supported fair value measurements, with pricing tied to the principal market, but it now includes the new disclosure requirements.
He said they were working directly with the FASB for the past 18 months or so as they underwent every step in the standard-setting process, which is what allowed them to know what they’d need to change. Jacob, a former member of the FASB staff, said the company plans further improvements in the future.
“TaxBit adjusted its software to work with the new FASB standard and there’s much more to come! … We are about to launch specific fair value adjustment workflows, multiple book and multi-entity reporting, along with expanded integration coverage,” he said.
Cryptocurrency tax and accounting software provider Ledgible has also incorporated the fair value adjustment standard, making the solution ready for the new rules right now. Gabriel Brin, Ledgible’s vice president of tax and accounting products, said the company began preparing for this change as early as March, when the board first released its exposure draft. The internal accounting and product teams created a roadmap around topics they viewed as “sure things” for the final draft through collaboration with their internal experts, plus prominent thought partners from regulatory, public accounting, and private and public organizations.
“The resulting consensus was that booking negative price action on digital assets on the balance sheet through impairment expense was only capturing one side of this volatile asset group. This method was missing the appreciation side of price action for the assets. This was leading to misleading and inaccurate valuation of assets on financial statements for both public and private organizations that hold digital asset investments,” he said.
NFTs, wrapped tokens, governance tokens and more
During the FASB meeting where the new standard was approved, board member Sue Cosper acknowledged that the guidance would be restricted to crypto assets only and not include more complex types of digital assets. This was mostly for speed.
“I know there will be some that are disappointed that we haven’t expanded the scope to address wrapped tokens and NFTs and what not,” she said. “But I think that intentionally keeping this project narrow has really allowed us to get this information in the hands of investors sooner.”
Centri’s Andrusko, though, said that it’s not always clear which category a given digital asset falls into. Some are easy enough to identify as a cryptocurrency, but things can get more complicated when it comes to NFTs and other blockchain-based assets. For example, some tokens have multiple functions, like one acting as both a governance token and a currency. Others might develop multiple functions over time.
“You’re still going to go through this assessment with auditors, and as you go through there will be some that will be more straightforward like bitcoin or Ethereum that will clearly be under this [standard], but understanding whether or not an NFT or wrapped token or a company-issued token [counts is more of a challenge] because it may or may not fall under this new guidance,” he said.
Camuso felt this could create complications in terms of reporting, especially if FASB does not soon provide guidance for these issues. He understood that FASB wanted to keep things simple, but he still felt there was a missed opportunity to truly tackle some of the more complex areas of the digital asset arena.
“This could create complications in terms of reporting but also if the guidance related to these unique assets are not clear this can also create further issues in terms of financial reporting requirements. FASB could have taken a more aggressive approach and included guidance on NFTs and wrapped tokens in the new standard. However, this could have taken much longer and led to unclear guidance. The lack of clarity about the classification of these assets could make it difficult for entities to comply with the FASB standard but I also acknowledge that there is further complexity associated with the reporting considerations for these assets,” he said.
Lehman College’s Smith similarly thought that while it was laudable that FASB was finally turning towards the cryptocurrency arena, he thinks the standard doesn’t recognize the major changes that the market has been undergoing over the last few years. He understood that it would take time to create this guidance, but said these are significant components of the crypto sector at this point.
“The FASB should be applauded for finally addressing the crypto accounting issue, but the crypto space has expanded and developed far beyond simple bitcoin and a small handful of other instruments. Following the final vote at the end of the year, the FASB should immediately begin addressing these more complicated, but fast-growing segments of the crypto market,” he said.
People may need to wait a little while. Christine Klimek, a spokesperson with the Financial Accounting Foundation, said that at this time there are no plans for a project specifically addressing NFTs or wrapped tokens or governance tokens.
FASB’s staff recommended the amendments be effective for fiscal years beginning after Dec. 15, 2024, including interim periods within those fiscal years for all entities. Most of the board members agreed, although some felt an extra year should be allowed for private companies. Early adoption will also be allowed.
Klimek said the final standard will be drafted before the end of 2023.