FASB Issues Proposed Accounting Standards for Crypto Assets

At a glance

• Main takeaway: The Financial Accounting Standards Board (FASB) issued a proposed accounting standards update (ASU) for certain crypto assets.
• Impact on your business: The FASB is asking for comments by June 6, 2023, and it is unlikely that this will be adopted until late 2023 or early 2024.
• Aprio’s Technology and Blockchain CPA Services team can help you implement proper internal controls to mitigate risk for your company.

Schedule a consultation with Aprio today.

The full story:

On March 23, 2023, the Financial Accounting Standards Board (FASB) issued a proposed accounting standards update (ASU) to improve the accounting for, and disclosure of, certain crypto assets. The proposed ASU is in response to feedback from stakeholders, which indicated that improving crypto asset accounting should be a top priority for the Board.

What’s changing from current standards

Under current U.S. Generally Accepted Accounting Principles (GAAP), crypto assets within the scope of the proposed ASU are accounted for as indefinite-lived intangible assets. Those assets are tested for impairment. If the carrying amount of the asset exceeds its fair value, an entity is required to recognize an impairment loss and reduce the carrying amount of the asset to its fair value. Subsequent increases in the carrying amount of the asset and reversal of an impairment loss are prohibited.

The proposed ASU would require that an entity measure certain crypto assets at fair value in the statement of financial position each reporting period and recognize changes in fair value in net income. The proposed amendments also would require that an entity provide enhanced disclosures for both annual and interim reporting periods, which would provide investors with relevant information to analyze and assess the exposure and risk of significant individual crypto asset holdings.

ASU requires enhanced disclosures

The proposed ASU also would require that an entity present crypto assets measured at fair value separately from other intangible assets in the balance sheet and changes in the fair value measurement of crypto assets separately from changes in the carrying amounts of other intangible assets in the income statement (or statement of changes in net assets for not-for-profit organizations).

For annual and interim reporting periods, the proposed ASU would require that an entity disclose information such as the name, cost basis, fair value, and number of units for each significant crypto asset holding, and the aggregate fair values and cost bases of the crypto asset holdings that are not individually significant.

For annual reporting periods, an entity also would be required to disclose a rollforward of activity in the reporting period for crypto asset holdings, including additions, dispositions, gains, and losses. This provision of the proposed guidance, the requirement to disclose the cost basis, will require companies still maintain this data, which has been difficult and onerous for some companies.

Proposed standard could present challenge for companies

Reporting crypto assets at fair value could present challenges for companies, especially those that hold a large number of different types of crypto assets.

The valuation of crypto assets can be volatile, with significant price fluctuations in a short period. Additionally, determining the fair value of illiquid or thinly traded crypto assets may require significant judgment and estimation.

Companies may need to invest in specialized software or seek external valuation expertise to comply with the proposed ASU’s fair value measurement requirements. Moreover, companies will need to ensure that they have robust internal controls to validate the completeness and accuracy of the data used to determine the fair value of their crypto assets.

‘Book vs. tax’ difference could arise for U.S. companies

In the U.S., the IRS treats cryptocurrencies as property for tax purposes. If the proposed ASU is adopted, companies would be required to measure and recognize changes in fair value in their financial statements, which would create a book vs. tax difference, as tax will not be recognizing any unrealized gains or losses. Additionally, the enhanced disclosures required by the proposed ASU may provide the IRS with more information to enforce compliance with tax laws related to cryptocurrencies.

It is important for businesses to remain current on developments in both accounting standards and tax laws to ensure compliance and avoid any potential penalties.

The FASB is asking for comments by June 6, 2023, and it is unlikely that this will be adopted until late 2023 or early 2024.

The bottom line

In summary, the FASB’s ASU on the accounting for, and disclosure of, certain crypto assets will improve financial reporting by showing the true balance sheet of companies that previously showed amounts not useful to users. However, the proposed amendments will come with challenges, including the valuation of thinly traded tokens and onerous disclosure requirements.

Despite the challenges, these proposed changes will likely provide investors with more relevant information to analyze and assess the exposure and risk of significant individual crypto asset holdings.

Related Resources/Assets/Aprio.com articles/pages

Big changes for the crypto world

Technology and Blockchain CPA Services

Aprio’s Blockchain experts can guide you in understanding the proposed standard and implementing the proper internal controls for your company. Schedule a consultation today.

Disclosures

Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding this matter.