Crypto Accounting – FASB Weighs in and other Tidbits

Background

Stakeholders have been awaiting valuation and disclosure direction in the crypto asset arena for quite some time. The recently issued standard now validates the US GAAP accounting for non-investment entities by requiring crypto assets to be measured at fair value for each period reported, with the changes in that value recognized in net income. Considerably, more disclosure will occur with respect to significant holdings, contractual restrictions, and changes during the period. FASB Chair Richard Jones expects the newly minted promulgation to reduce the complexity and cost currently experienced under crypto asset accounting.

Accounting Standards Update 2023-08 – Intangibles – Goodwill and Other – Accounting for and Disclosure of Crypto Assets specifically applies to all assets meeting the following criteria:

1. Meets the definition of an intangible asset under the FASB Accounting Standards Codification
2. Does not provide the asset holder with enforceable rights to or claims on underlying goods, services, or other assets
3. Created or resides on a distributed ledger based on blockchain technology or similar platforms
4. Secured through cryptography – a process of coding information that only the intended party can discern
5. Fungible – meaning it can be exchanged or traded for something else of the same or similar kind
6. Are not created or issued by the reporting entity or its related entities (i.e., related party tokens)

The ASU’s mandatory effective date is 2025, but early adoption is permitted. Adoption requires a cumulative effect adjustment to the opening balance of beginning retained earnings in the year of implementation.

The prior crypto accounting methodology, unless precluded by industry-specific GAAP, incorporated an indefinite-lived intangible asset accounting. This approach calls for assets to be tested for impairment annually or potentially more frequently, depending on circumstances, to determine if it is more likely than not impaired. If the carrying amount of the asset exceeds its fair value, the reporting entity is required to reflect an impairment loss and reduce the asset to its fair value. No future increases or reduction adjustments to the impairment loss would be allowed.

So, what’s the rub?

The shift from a cost-less impairment model to fair value reporting tends to level the playing field for commercial company reporting. FASB chair Richard Jones was careful to note that it pertains to certain crypto assets and not necessarily the entire universe of what is evolving in the crypto space.

Financial reporting specifics of the ASU will require separate line-item reporting for crypto assets in the balance sheet. Changes in the fair value measurements of the crypto inventory are to be reported separately in the income statement. Disclosure requirements include detailed reporting for each significant crypto asset holding and, in the aggregate, for those not individually important.

The cryptocurrency oversight community continues to percolate regarding who should ultimately govern the sector, vacillating between the commodities market oversight and the Security and Exchange Commission (SEC). The SEC has dug in its heels. Thousands of versions of cryptocurrency now exist in circulation. The global crypto market capitalization totals $2.6 trillion as of February 2024. Bitcoin, by far, dominates the current environment, representing 49% of the total value of the crypto market. Bitcoin is categorized as a “payment token,” the earliest version of alternative currency, and is not considered a security subject to the regulations that govern bonds and stocks.

However, multiple variations are evolving, including such crypto assets as “security tokens” (representing earnings streams), “utility tokens” (claims on goods and services), and now “token burning” (price stabilization techniques). These modifications clearly cross the currency equivalency line and are key conditions supporting the ongoing debate about where regulation should rest.

Cryptocurrency and Statutory Insurance Accounting

From the statutory insurance accounting perspective, the Statutory Accounting Principles Working Group (SAPWG) currently treats all direct ownership of cryptocurrency as a non-admitted asset under SSAP No. 2R – Cash, Cash Equivalents, Drafts and Short-term Investments. Yet, with the continuing development of crypto variants and further activity in the digital currency space by the FASB, there will likely be more activity on the statutory side.

Just by its nature, whether one considers cryptocurrency a viable market or a wild hipshot to circumvent the currency marketplace and make a speculative profit, the global investment community is highly active. This article focuses on the financial accounting aspects of this market, but many other fascinating aspects exist, not to mention this industry’s massive carbon footprint requirements.