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FASB Settles on Fair-Value Accounting for Measuring Crypto Assets

Oct. 12, 2022

The method would allow companies to recognize losses and gains immediately

The Financial Accounting Standards Board on Wednesday said companies should use fair-value accounting for measuring bitcoin and other crypto assets, moving a step closer to a standard that could clear up uncertainty over reporting how much such holdings are worth.

There are currently no specific accounting or disclosure rules for cryptocurrency assets, so businesses classify them as indefinite-lived intangible assets similar to intellectual property such as trademarks. Companies must review the value of such assets at least once a year and write it down if it drops below the purchase price. If the value rises, companies can only record a gain when they sell the asset, not if they continue holding it.

Companies and accountants want the FASB to adopt fair-value accounting instead, which would allow them to recognize losses and gains immediately and treat digital assets as financial assets.

The FASB on Wednesday said fair-value accounting best captures the economics of crypto assets and determined the method would be a requirement rather than an option for companies. “We’ve heard from investors that they want transparency through disclosure, and the only way to get to that is fair value,” board member Gary Buesser said.

The price of bitcoin, the world’s largest cryptocurrency by market capitalization, has fallen from a high of nearly $68,000 in November to around $19,100 this month, according to data provider FactSet.

“The only way to get any kind of real information on the holding of bitcoin or Ethereum is through fair value,” Mr. Buesser said. Ethereum is the second-largest cryptocurrency by market cap.

Companies and investors have asked the FASB for years for rules on how to account for and disclose crypto assets. The accounting standard-setter in December started researching whether to establish new regulations, and in May it added a crypto project to its technical agenda that sets its rule-making priorities.

The current approach to accounting for digital assets requires businesses to prepare financial statements in a manner that doesn’t accurately reflect the results of their operations or financial condition, according to MicroStrategy Inc. Chief Executive Officer Phong Le.

The Tysons Corner, Va.-based software company had around $1.99 billion in bitcoin as of June 30, down from about $2.89 billion at the end of March, according to regulatory filings. MicroStrategy acquired another roughly 301 bitcoins between August and September, bringing the current value of its digital assets to around $2.5 billion.

“We expect the disconnect between the reported carrying value on our balance sheet and the fair market value of our bitcoin holdings to grow significantly over time,” Mr. Le said in a comment letter to the FASB last year, when he was MicroStrategy’s chief financial officer.

This is due to the volatile nature of bitcoin and MicroStrategy’s inability to adjust for future increases in value, he said, adding that digital assets should be measured at their fair value. The company declined to comment on the FASB’s decision.

MicroStrategy, payments firm Block Inc. and auto maker Tesla Inc. are among the few publicly traded companies that have had substantial bitcoin holdings.

New accounting rules in this area could change this or alleviate companies’ reluctance, said Deniz Appelbaum, assistant professor of accounting and finance at Montclair State University. “Without these standards for the accounting and valuation of crypto assets, companies are reluctant to hold them,” she said.

The FASB in August detailed criteria for assets it will include in its cryptocurrency project, leaving out nonfungible tokens and certain stablecoins. The board will next consider what will have to be included in disclosures about the assets and how companies should inform investors.

The two topics will likely be discussed by the end of the year, according to a FASB spokesman, and the board would then vote on whether to issue a proposal. He declined to comment on when that might occur.

[Wall Street Journal]

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