The crypto world is abuzz after the Financial Accounting Standards Board's (FASB) momentous vote to propose that bitcoin and similar digital assets should be measured at fair value. This is a significant departure from the more typical, current method of reporting cryptocurrency as intangible assets, and it could have far-reaching implications for accounting for these assets.
What is Cryptocurrency?
Cryptocurrency is a digital or virtual currency that uses cryptography for security. It is decentralized, meaning it is not subject to government or financial institution control. In recent years, cryptocurrency has become an increasingly popular form of payment for goods and services. Bitcoin, the most well-known type of cryptocurrency, was first introduced in 2009 and has since seen a surge in both value and mainstream acceptance.
As the world becomes increasingly digitized, it's no surprise that businesses are starting to accept cryptocurrency as payment. It is fast, efficient and secure, and it can be used to make global transactions with ease. However, there are also some risks associated with accepting cryptocurrency. For one thing, the value of cryptocurrencies can be very volatile, which means that businesses could end up accepting payments worth less than when transactions were made. There's also the possibility of fraud and theft, as hackers often target those holding cryptocurrencies.
What Are the Proposed Accounting Changes?
Current accounting literature describes how to account for cash and securities; however, many digital assets do not meet these definitions. Instead, assets like cryptocurrency are usually treated as intangible assets for accounting purposes. This classification requires companies to apply an impairment model, which means that they typically reduce the value of their asset when the price goes down, but do not get to increase the value when the price goes up. If the value of an entity’s cryptocurrency holdings has increased as of the balance sheet date, the company cannot update its books to reflect the current market value. This treatment often results in significant impairment losses appearing on balance sheets and prevents the users of financial statements from understanding the market value of an entity’s cryptocurrency holdings.
In an attempt to provide official guidance at its meeting on Oct. 12, FASB tentatively decided that when it comes to accounting for crypto assets, public and private entities must:
- Use the guidance in Topic 820, Fair Value Measurement, to measure crypto assets at fair value.
- Recognize increases and decreases in fair value in comprehensive income each reporting period.
- Recognize certain costs incurred to acquire crypto assets, such as commissions, as an expense (unless the entity follows specialized industry measurement guidance that requires otherwise).
Scoping: What Assets Qualify?
The tentative decision to apply fair value accounting was not the first decision the FASB made on this project. The project originated from research where the FASB sought feedback from stakeholders, who felt there was a lack of clarity in this area.
In August, the board detailed that the scope of this project, and thus the assets that will qualify for fair value accounting, are crypto assets held by an entity meeting the following five stipulations:
- Meet the definition of an intangible asset as defined in the Codification Master Glossary
- Do not provide the asset holder with enforceable rights to, or claims on, underlying goods, services or other assets
- Are created or reside on a distributed ledger or "blockchain"
- Are secured through cryptography
- Are fungible.
Assessing the Impact
In recent years, cryptocurrency has become a hot topic in finance. While some investors remain cautious, others have openly embraced the new asset class. The most significant obstacle has been the lack of clarity surrounding the accounting and tax treatment of cryptocurrency, which is why the proposed changes are seen as a long time coming. Financial leaders have been critical of the current accounting practice, which makes companies reflect drops in their reports if a digital asset loses value but not gains if the same asset rises.
If finalized, the tentative decision from the FASB is a major step forward in bringing greater clarity and transparency to the accounting of digital assets, improving the usefulness of financial statements for entities holding these types of assets. The additional accounting clarifications may reduce the cost and complexity associated with the bookkeeping related to these assets. However, significant challenges will remain in determining the fair value for the assets. Significantly the FASB decided that they will not provide interpretive guidance on how to determine the fair value of crypto assets.
However, entities will not be able to apply fair value accounting yet. Rather the existing intangible asset model will apply at least until the FASB issues a final accounting standard update. The boards next step for the project includes holding a future meeting to address crypto accounting guidance for presentation, disclosure, and transition.
At CBIZ, our accounting experts will continue to monitor the latest developments from FASB about accounting for cryptocurrency. We know that navigating the ever-changing landscape of digital assets can be challenging, so we're here to help. Please connect with our experts if you have any questions regarding digital asset accounting.
Published on October 18, 2022
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