Crypto companies and those with holdings of digital assets will now finally get accounting rules to measure the value of their cryptocurrency stash.
The US accounting standard-setters unanimously voted on Wednesday to publish the new long-awaited accounting rules by this year's end. However, the rules will go into effect in 2025, with companies having the option to apply them early, according to the Financial Accounting Standards Board (FASB).
The crypto industry is hailed as a big step forward for the entire market, which can take crypto adoption further mainstream by encouraging large corporations that want to hold crypto on their balance sheet but can't due to accounting complexities.
Under new rules, companies that hold or invest in crypto assets like Bitcoin, Ethereum, and others will be required to report their holdings at fair value, confirming changes recommended by the group almost a year ago. This measurement aims to capture the most up-to-date value of an asset, including rebounds in value after the value of the asset has dropped.
This ability to record recoveries will be an improvement over the current practice. However, the new standard will also bring volatility into the earnings of companies that are heavily invested in crypto.
“It's not very often that we can both take cost out of the system and improve the decision usefulness of information, and it makes it a really easy vote to do both of those,” said FASB member Christine Botosan.
The Current State
Up until now, there have been no accounting rules in the US that specifically address just how companies recognize and measure their crypto holdings.
In the absence of any rules, companies like crypto exchange Coinbase, enterprise software maker MicroStrategy, and automaker Tesla, which wrote down the value of its Bitcoin to $184 million as of the end of the June 2023 quarter, have been defaulting to an American Institute of CPAs practice guide that treats most digital currencies as an intangible asset. However, this category includes things like brands, trademarks, and copyrights, all of which, unlike crypto, are rarely traded.
By treating their cryptocurrencies as tangible assets, companies have been recording their crypto holdings at the historical price they bought them for. These holdings are assessed every quarter for impairments or drops in value. If the price of a crypto asset drops even briefly during the period, it's considered impaired, and companies can't revise values upward even if the market recovers.
Under the old treatment, companies had to take an impairment charge on their books even if they didn't sell, while they could not take the benefit of price surges unless they sold. This way, the current accounting method routinely hits the earnings of MicroStrategy, the largest public company holder of crypto.
Back in May, in response to the board's original proposal, MicroStrategy CFO Andrew Kang wrote to FASB that fair-value crypto reporting would enable the company to provide its investors with a more relevant view of its financial position as well as the economic value of its significant BTC holdings. This, in turn, would allow investors to make informed investment and capital allocation decisions, he added.
On Wednesday, FASB Chairman Richard Jones said that investors “overwhelmingly” prefer allocating capital based on financial statements that provide them with better information to make decisions. As a result, he has been “fully supportive” of the new rules.
The New Rules
FASB is a non-governmental standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles (GAAP) within the US for public and private companies and nonprofits in the public's interest. The board is overseen by the US Securities and Exchange Commission (SEC) and proposed the update in March.
At the Wednesday meeting, the FASB board evaluated comments on the suggested changes to the rules and gave staff permission to draft a final version of the new accounting standard. The rules will be effective for fiscal years starting after Dec. 15, 2024. The final language, meanwhile, is expected to be approved before the end of the year in a written vote.
Under the new rules, companies will have to make a separate entry for their cryptocurrency holdings so investors can get a clear picture from their financial statements regarding how much a company is invested in crypto.
Additionally, companies will have to disclose significant holdings of crypto and any restrictions on those holdings in their footnotes every reporting period. Meanwhile, on an annual basis, they will have to reconcile or disclose changes in the opening and closing balances of their crypto assets, which will be broken out by category.
However, companies won't have to include activity information about crypto assets received as payments and immediately converted to cash within the reconciliation, FASB agreed Wednesday.
On top of this, with crypto to be measured at fair value, companies will also be subject to the disclosures required in the applicable accounting rules, ASC 820, to help financial statement readers know just how companies came up with their results.
The new accounting rules will be mandatory for all public or private companies starting next year-end, including interim periods within those years, which means 2025 adoption for calendar year-end companies. Companies will be allowed to adopt these rules once FASB formally publishes them later this year, and the board is encouraging them to seek early adoption of the new standard.
Not Everything Covered
As we talked about above, crypto assets are currently classified as intangible assets and fungible, meaning they can be interchanged with assets of the same type.
This doesn't cover non-fungible tokens or NFTs, which are unique digital tokens that can't be replicated and can be anything from digital sports trading cards to video clips or stablecoins, which are cryptocurrencies that peg their market value to another asset class or wrapped tokens; which are digital tokens that allow crypto from one blockchain to be used on another.
As a result, several groups, including all four Big Four accounting firms — Deloitte, PwC, Ernst & Young, and KPMG — pressed FASB to include wrapped tokens in the final plan due to being held for similar purposes and trading at about the same price as the underlying crypto assets.
Most board members said on Wednesday that they needed more information about the market before they could expand the scope of the board's work and rejected calls to include wrapped tokens. Assets with contractual rights to cash flows or ownership of goods or services wouldn't fall under the FASB's requirements.
“I know there will be some that are disappointed that we haven't expanded the scope to address wrapped tokens and NFTs and whatnot, but I think intentionally keeping this project narrow has really allowed us to get this into the hands of investors sooner,” said Susan Cosper, a FASB board member.
FASB has said that it will continue monitoring the cryptocurrency market and, if necessary, will take additional action.
This is just the latest win for the crypto market, with the sector having secured multiple victories in the past few months in the court – in the form of Ripple, Grayscale, and Uniswap, and this is expected to be just a new one with more to follow.
A Long Journey
For years, the valuation of cryptocurrencies has been a challenging aspect of financial reporting for companies, given the volatile nature of these digital assets, making it difficult to accurately assess their fair market value. As a result, companies and accountants have repeatedly called for new rules.
So, these new accounting rules have been a long time coming, as in the past, FASB has rejected three separate requests to write rules for crypto since 2017. All these years, the board reasoned that few companies use Bitcoin significantly.
But ever since Tesla and MicroStrategy entered the crypto industry and started investing in the crypto asset, the board changed its tune. Still, the board kept its focus narrow, covering assets that are created or reside on distributed ledgers based on blockchain technology and are secured through cryptography.
Previously, as part of the proposal, the FASB had asked the public to weigh in on whether companies should have to provide additional information on areas such as the nature and purpose of holding crypto, crypto-related gains and losses, and information about pricing and its cryptographic private key to keep these assets safe.
In a letter to the FASB, payment company Block's Chief Accounting Officer Ajmere Dale said at the time that they had security concerns with disclosing information on private keys and that it wouldn't be useful to readers. As such, it would prefer that such information remain confidential.
Earlier this year, MicroStrategy also said that disclosing the nature and purpose of holding crypto could become less relevant in the future if digital assets continue to gain wider adoption and become a mainstream treasury reserve asset option.
This week, the FASB said it didn't add any of these disclosures as they wouldn't be necessary for investors.
Some companies also said the proposed exclusion of crypto with so-called enforceable rights was unclear. Crypto lender BlockFi, which has filed for Chapter 11 protection, asked the FASB to remove “enforceable rights” from the proposed rule as it could “eliminate a large portion of digital asset tokens from consideration and undermine the core purpose of this standard.” Meanwhile, crypto asset manager Grayscale Investments said in a June letter that this criterion could require companies to conduct additional analysis and use more judgment.
The board opted to keep the term “enforceable rights,” with FASB Chair Rich Jones saying that making changes would require more research and could slow down the project.
A Big Move for Crypto Industry
The new rules have been long-anticipated and aim to provide a more accurate reflection of the market value of digital assets, bring greater transparency to the financial reporting of companies that hold crypto assets, and present a true picture of these companies' financial health.
The crypto market participants are excited with this development, calling it big news and a huge win for cryptocurrencies as accounting measurement has been one of the barriers for US-based corporations to hold crypto, and the new rules will make it easier for institutions to add digital assets to their balance sheet.
Through fair value accounting, which permits companies to periodically—i.e., every quarter—report unrealized gains and losses, these new rules can provide a tangible benefit on the books. Specifically, if the price of an asset like Bitcoin increases, companies can report this financial upside without actually having to sell the asset. This advantage could make companies more likely to add Bitcoin to their balance sheets and encourage them to become long-term holders, as they can recognize appreciation without needing to sell.
Moreover, both investors and regulators will have access to more timely and accurate information about the financial health of companies involved in the cryptocurrency space. This will provide clarity and increased transparency, which can be expected to foster greater trust and confidence in the industry.
Not to mention this move also aligns with the growing acceptance of crypto in mainstream finance, and in order to become more integrated into the global financial system, it is essential that accounting standards also evolve to cover digital assets. This way, it recognizes the maturing market and crypto's importance in the broader economy.
“This upgrade to FASB accounting rules eliminates a major impediment to corporate adoption of BTC as a treasury asset,” tweeted Michael Saylor, the founder and former CEO of MicroStrategy (MSTR), which owned roughly 152,300 BTC at the end of the second quarter.
However, implementing fair value accounting for crypto is not without its challenges. Given crypto's inherent volatility, companies would have to invest in robust valuation methods and procedures to ensure accuracy in their financial reporting. Moreover, auditors will need to develop expertise in assessing the fair market value of these assets.
Having said that, the introduction of fair value accounting rules for cryptocurrencies is a significant step forward for the industry.