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FASB finalizes new fair value crypto accounting

Sept. 6, 2023

Many crypto companies have clamored for the fair value fix, which won’t apply to such assets as NFTs.

Dive Brief:

The Financial Accounting Standards Board voted 7-0 Wednesday to effectively finalize new accounting standards for certain crypto assets such as Bitcoin, keeping the guidelines narrowly focused by excluding nonfungible tokens (NFTs). At the same time, the board recognized the need to adapt to fast-changing financial technology by including assets that are “created or reside on a distributed ledger based on blockchain or similar technology,” according to documents prepared for the meeting.

Under the accounting standards update — which will go into effect for the fiscal years beginning after Dec. 15, 2024 — the rules that underpin generally accepted accounting practices will call for companies to report qualifying crypto assets using the fair value accounting method, which is a change from current practice under which most companies report it as an intangible asset that is impaired to the lowest observable value within a given reporting period.

The accounting change is one of the most consequential in a very busy year for FASB decisions, according to Jack Castonguay, assistant professor of accounting at Hofstra University in New York. “This is much bigger than the three previously issued ASUs,” Castonguay wrote in an emailed response to questions from CFO Dive. “It provides guidance where there wasn’t much, if any, to begin with. It fundamentally changes the accounting structure — going from impairment accounting to fair value accounting is a huge shift as it changes both balance sheet presentation and income statement recognition.”

Dive Insight:
While many companies in the crypto industry have long clamored for fair value accounting, the FASB decision comes at a tricky time for crypto. The sector is just beginning to regain its footing after the collapse of FTX and other crypto companies last year.The fall in valuations prompted sharp criticism of regulatory oversight of the new asset class.

On Wednesday, FASB Chair Richard Jones noted that in his brief time at the FASB no other issue has “excited such passion” as crypto assets. But he made clear at the meeting that, in spite of that increased attention, the FASB has sought to remain focused on its mission of making sure accounting reflects economic reality.

“Our mission is to best reflect the economics of the transaction, [and ] provide investors and allocators of capital with the information they need,” Jones said. “I think this moves the needle there, I think we’ve heard overwhelmingly from investors that allocate capital that this will provide them better information to make their decisions.”

In addition to investors, financial executives and preparers of financial reports may also benefit from the new rule, experts have said, because it resolves a reporting issue that may have discouraged CFOs from putting digital assets on their balance sheets.

The new standard is expected to be simpler for firms that hold crypto assets, because a company will report the value of the asset based on its level on a given exchange at the end of the reporting period, rather than having to follow the ups and downs of an asset’s value through a reporting period to report the lowest level, CFO Dive previously reported.

“The big difference is now their change in value, both gains and losses, will be reflected on the income statement if this is adopted,” Castonguay wrote. “Currently, only impairment losses are recognized. Essentially they have to immediately book any losses and can’t recognize gains or impairment reversals. This will add more variability to earnings but also more accurately reflect the economics of holding crypto assets.”

Grayscale Investments CFO Ed McGee was one of the executives who has supported the fair value change. Last year he told CFO Dive that he supported FASB proceeding quickly to provide relief that would allow digital assets to be held at fair value while also working toward creating a stand-alone section of the U.S. GAAP accounting standards.

McGee would need more time to review the FASB decision before commenting, but a spokesperson for Grayscale, one of the world’s largest digital asset managers, expressed general support for the FASB’s new initiative.

“At Grayscale, we are supportive of all progress that provides clearer crypto accounting guidance. Ultimately, these are important milestones that further cement the role of digital assets in the global financial system,” the company statement emailed to CFO Dive said.

[CFO Dive]

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