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FASB Crypto Proposal Coming by End of March amid Slight Sector Rebound from Lows

February 3, 2023

The FASB on Feb. 1, 2023, said the public will get 75 days to comment on a proposal on accounting for cryptocurrencies, provisions aimed at reflecting the underlying economics of Bitcoin and other tokens on the balance sheet.

The proposal will build the first explicit standard on crypto assets in U.S. GAAP and is expected to be issued by the end of March. A final standard will be published by year-end, according to the discussions.

FASB members affirmed that the guidance will be narrowly drawn for fungible tokens, deemed to be intangible assets, secured through cryptography on a blockchain or distributed ledger, and do not provide the asset holder with enforceable rights to or claims on underlying goods, services, or other assets.

“I think investors asked us ‘with cryptocurrency can you give us fair value information?’ and we’re providing that,” FASB member Gary Buesser said. “‘The old accounting doesn’t work, this accounting gives me much better information – I get units, I get cost basis, fair value, the market it trades in,’ that’s the vast majority of what investors need,” he said. “‘It gives me an insight into what the company owns and what the value is and what they paid for it’ and this is to me an example of where we operate in a really quick manner and provide the market with what it wants and this is a win-win for investors.”

Small Rebound from Lows in Crypto Market

The FASB’s work on the proposal finishes at a time when the crypto sector is experiencing a slight rebound, mirroring the stock market which has been rallying, market watchers said. But in relation to the health of the crypto sector, there is still a lot of pain and uncertainty and a push for regulation. Furthermore, enthusiasm for cryptocurrencies, including popular tokens like Bitcoin and Ethereum, has waned due to bankruptcies and scandals like FTX which created hesitancy among those who previously were quick to dabble.

For the FASB, developing the proposal is a landmark achievement, coming after years of pressure from the crypto sector which said that current accounting rules do not necessarily reflect the underlying economics of crypto assets. Tokens today must be accounted for as intangible assets and reported on the balance sheet at historical cost. Those assets are deemed to be impaired when the price drastically drops but that loss cannot be recovered in financial reports when the price rebounds.

The proposal aims to eliminate those concerns by enabling tokens to be measured at fair value under Topic 820, Fair Value Measurement. An entity should recognize certain costs incurred to acquire crypto assets such as commissions as an expense unless there is some kind of industry guidance that would suggest otherwise for those entities, the board decided last year. Companies should present crypto assets separately from other intangible assets on the balance sheet because they have different measurement requirements. This presentation approach would result in a prominent display of crypto assets, providing investors with clear and transparent information about the fair value of crypto assets within the financial statements.

Disclosure rules will also be proposed.

Won’t Apply to Creators or Issuers of Crypto Assets

On Feb. 1, the board also voted on several miscellaneous issues, including against broadening the scope of the proposal to include creators or issuers of crypto assets, an issue that was flagged during outreach.

Furthermore, the provisions will not address so called wrapped tokens, which allow crypto assets from one blockchain to be represented and used on a different blockchain. Board members said wrapped tokens were not pervasive, and could introduce knock-on implications.

“The reason why I don’t want to address the accounting in this project is it seems like it is an asset backed something” and “wrapped crypto at this point is de minimis,” Vice Chair James Kroeker said. “We’re saying ‘well if we expanded the scope it is to now include asset backed – is that an asset-backed security? I think we’d need to do some work with the SEC to understand ‘now I’m trading something that is asset backed,’” he said. “But I think the Bitcoin itself if not asset backed, it is just a Bitcoin. But a wrapped something does not have rights in a contract that entitles me to potentially someone else’s asset that sounds like an asset backed investment – is it an asset backed security? is it an asset backed investment? is it an in debt receivable? – I don’t know how we would answer that without knowing the terms of every single contract.”

Related to how to transition the guidance, the FASB agreed that companies should use “a cumulative-effect adjustment to the appropriate components of equity (or net assets in the statement of financial position for not-for-profit organizations) as of the beginning of the annual period in which a final standard is adopted.”

[Thomson Reuters]

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