According to recent reports, the Financial Accounting Standards Board (FASB) is gathering feedback on long-awaited proposed changes to how companies report crypto holdings. The proposals mark the first attempt to establish guidelines on how US companies should disclose their crypto.
The FASB is a private standard-setting body whose primary purpose is to establish and improve Generally Accepted Accounting Principles within the United States in the public’s interest. It has been sanctioned by the Securities and Exchange Commission for enhancing financial reporting standards and providing guidance to both public and private companies in the preparation of their financial statements.
The board introduced a proposal to account for crypto assets at fair value, with any changes recognized in net income during each reporting period, and will be inviting comments until June 6. According to the FASB, the existing accounting treatment of crypto as indefinite-lived intangible assets fail to offer investors informative data for decision-making purposes.
The SEC defines intangible assets to include “acquired technology, customer relationships, trademarks, and trade names,” which doesn’t exactly resonate with the function of major cryptocurrencies like Bitcoin and Ethereum.
As a result, companies have to evaluate the worth of their crypto holdings on an annual basis and make a downward adjustment if the value falls below the purchase price. In case the value of their crypto rises, companies can only recognize a gain when they sell the asset, rather than during the holding period.
The FASB’s new proposal intends to address the demand from companies and accountants, aligning with the industry’s desire for a more consistent approach. Additionally, the hope is that an official accounting standard for crypto would facilitate more companies to hold digital assets on their balance sheets.
Reportedly, the agency also renamed the project after receiving feedback, replacing the term “digital assets” with “crypto assets.” Additionally, some investors separately requested more extensive disclosures regarding the type of crypto assets held by entities and any changes in those holdings.
In this context, the FASB is reportedly proposing two other major accounting rule changes beyond fair value measurement for crypto assets. They are:
- Fair value changes: The board decided value fluctuations should impact company earnings, to be reflected in the income statement through metrics like earnings per share and net income.
- Financial statement disclosures: Companies would be obligated to disclose significant holdings of crypto assets, their historical cost basis, and fair value.
Companies would also need to provide an annual reconciliation or roll-forward of their crypto-asset activity. Disclosure of any restricted assets will also be required. About 40 publicly-traded companies currently hold bitcoin on their balance sheets whereas a smaller number hold Ethereum.
Aaron Jacob, who leads the accounting solutions team at crypto tax compliance firm TaxBit, briefed the media that the existing accounting treatment for crypto in the US has been a major challenge for the industry. Under the current approach, crypto is recorded on balance sheets based on their historical cost, with additional adjustments made for impairment charges.
Considering FASB’s objective behind the proposed framework and the industry’s response to it, this could be a progressive step in the direction. Some also expect it to motivate more companies to invest in cryptocurrencies and it is only a matter of time before the impact of the standards could be assessed once implemented.