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FASB: Fair Value measurement for all crypto assets

At its meeting on October 12, the Financial Accounting Standards Board (FASB) made a provisional decision to mandate fair value measurement for all crypto assets included by the scope. Both governmental and private businesses would be subject to the obligation.

In May, the FASB added a project to its technical agenda that dealt with accounting for digital assets. It made the decision in August to restrict the project's focus to fungible digital assets treated as intangible assets under the most recent version of U.S. generally accepted accounting rules (GAAP). The board agreed to include broker-dealers and investment firms that use industry-specific GAAP and altered the project's name to "Accounting for and Disclosure of Crypto Assets."

More than 400 respondents who backed fair value measurement responded to the board's request for feedback.

According to Scott Muir, a partner in KPMG's Department of Professional Practice, "it’s important to understand this group of digital assets is the one where there was a strong consensus U.S. GAAP was resulting in accounting information that was not useful. There is likely almost universal agreement FASB is on the right path in measuring these assets at fair value, and that this would be an improvement to existing GAAP. Determining the project scope appears to be the toughest decision FASB has to make."

According to Stephen McKinney, managing director of Deloitte's national office, "FASB tried to address what they believe they heard about the assets most in need of guidance, in order to reach a quick decision and avoid scope creep that can slow down projects. They understood some assets would fall out of scope, and they did not want to recreate the wheel for assets where there is existing accounting guidance."

The scope's crypto assets will be valued at fair market value in accordance with ASC Topic 820, Fair Value Measurement, and gains and losses resulting from changes in their fair value will be reported in comprehensive income on a period-by-period basis. For digital assets without published prices in active marketplaces, there is no exemption to apply an alternative assessment, such as measurement at historical cost less impairment.

"While it may be more difficult to obtain fair value for some crypto assets that do not trade actively than for others, ASC 820 is at least a known commodity as it has been around for quite a while," according to Muir.

Cryptocurrency acquisition costs, like transaction fees or commissions, would be expensed as they were incurred. If there is additional industry-specific advice for accounting for these expenses under U.S. GAAP, as there is for investment businesses (ASC 946) and broker-dealers (ASC 940), such guidance would still be used.

There is not yet any guidance in U.S. GAAP on how to account for these assets. They are thus treated as indefinite-lived intangible assets under ASC 350, which mandates measurement at historical cost with evaluation of potential impairment. The suggested fair value accounting is meant to allay worries that the current accounting approach does not accurately reflect the economics of transactions using crypto assets, whose prices vary greatly and often.

Applying the requirements of the impairment model to crypto assets presents additional difficulties for practitioners.

"Today, companies must monitor for impairment constantly, even daily, in order to determine the asset’s lowest observable fair value at any point within a reporting period. The proposed accounting would require determination of fair value at the end of the reporting period," according to McKinney.

Digital assets must fulfill five requirements in order to be included in the project's scope. They should:

1. Meet the definition of an intangible asset under U.S. GAAP;

2. Not provide the holder of the digital asset with enforceable rights to, or claims on, underlying goods, services, or other assets;

3. Reside on a distributed ledger, like a blockchain;

4. Be secured through cryptography; and

5. Be fungible.

"It appears FASB intends to capture crypto assets like Bitcoin, Ether, and Litecoin," according to Muir.

Nonfungible Tokens (NFTs), several stablecoins, and cryptocurrency assets that fit the U.S. GAAP definition of a security are excluded from the scope. Commodities were also left out of the project's current scope by FASB, but the organization will keep thinking about accounting for commodities as part of its research agenda and may add the subject to its technical agenda in the future.

"Most NFTs would fail the scoping criteria because they are not fungible and give rise to other rights and obligations for the holder," according to Muir.

"FASB indicated the population of NFTs is small compared with all digital assets, and the board was attempting to solve the accounting issue for the largest part of the population," according to McKinney.

In terms of breadth, there would be no distinction between private corporations and public companies when applying fair value to cryptocurrency assets.

"Investment companies and broker-dealers already measure these assets at fair value and account for related commissions and other costs, so it appears FASB was not looking to change what they do," according to Muir.

"Whenever a project is at this stage, practitioners should continue to monitor it and stand ready to provide comments and other feedback to the board," Muir advised. Companies other than investment companies and broker-dealers should continue to account for their crypto assets at historical cost less impairment until the standard is finalized.

The judgment is still in the preliminary stage, so before it is completed, FASB will follow the standard-setting due procedure.

"After making all decisions on the project, FASB will issue a proposed [accounting standards update], expose it for public comment, assess the feedback, and then vote on it before issuing a final proposal," McKinney said. At next meetings, the board will continue to debate and consider the accounting, including how to identify and derecognize, present financial statements, make disclosures about crypto assets that are relevant, and transition.

"The timing of FASB’s future decisions on this project is not known at this time, but given the board’s willingness to respond quickly to feedback received from the invitation to comment, it could be quicker than for other projects," said McKinney.


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