FASB releases exposure draft for cryptocurrency standards

The Financial Accounting Standards Board released an exposure draft that proposed rules on accounting for, and disclosing information on "crypto assets."

It's the first time the standards body has produced a formal proposal governing such assets. However, FASB said stakeholders have been saying the current way that crypto assets are generally accounted for, which treats them as indefinite-lived intangible assets, does not provide investors, lenders, creditors and other capital market participants with decision-useful information. Such a treatment reflects only the decreases, not the increases, in the value of crypto assets in the financial statements until they are sold.

The proposed standard would apply to crypto assets that:

1. Meet the definition of intangible asset as defined in the FASB Accounting Standards Codification Master Glossary;
2. Do not provide the asset holder with enforceable rights to, or claims on, underlying goods, services or other assets;
3. Are created or reside on a distributed ledger based on blockchain technology;
4. Are secured through cryptography;
5. Are fungible; and
6. Are not created or issued by the reporting entity or its related parties.

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Under the proposal, such assets will be accounted for at fair value, with changes recognized in net income each reporting period. An entity would be required to recognize the transaction costs to acquire a crypto asset, such as commissions and other related transaction fees, as an expense as incurred, unless applicable industry-specific guidance requires the entity to capitalize those costs.

Crypto assets will be measured at fair value separately from other intangible assets in the balance sheet, and changes in the fair value measure of crypto assets, similarly, will be done separately from changes in the carrying amounts of other intangible assets in the income statement.

Under the proposed roles, entities would disclose, for annual and interim reporting periods, the name, cost basis, fair value and number of units for each significant crypto asset holding and the aggregate fair values and cost bases of the crypto asset holdings that are not individually significant; and, for crypto assets subject to restriction(s), the fair value of those crypto assets, the nature and remaining duration of the restriction(s), and the circumstances that could cause the restriction(s) to lapse.

In annual reporting, entities would also need to disclose a rollforward, in the aggregate, of activity in the reporting period for crypto asset holdings, including additions (with a description of the activities that resulted in the additions), dispositions, gains and losses. If gains and losses are not presented separately, the entity is required to disclose the income statement line item in which those gains and losses are recognized. For any dispositions of crypto assets in the reporting period, entities must also report the difference between the sale price and the cost basis and a description of the activities that resulted in the dispositions. They must also disclose the method for determining the cost basis of crypto assets.

If passed, the amendments in the proposed update would require a cumulative-effect adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets) as of the beginning of the annual reporting period in which an entity adopts the proposed amendments. If ultimately passed, entities can choose to adopt early in any interim or annual period for which an entity's financial statements have not been issued (or made available for issuance) as of the beginning of the annual reporting period.

"During the FASB's recent agenda consultation process, stakeholders from all professional backgrounds identified digital assets as a top priority area for the Board to address," said FASB chair Richard Jones in a statement. "We responded to that feedback with the proposed ASU, which would provide investors greater transparency into the fair value of crypto assets held by entities, as well as additional disclosures about the types of crypto assets held and changes in those holdings."

The exposure draft release was preceded by several meetings where the board clarified and focused down the particularities of the proposed standard. FASB added this project to its agenda in May 2022 after the board received hundreds of requests from stakeholders for guidance on accounting for digital assets in response to a recent consultation on items to add to its agenda. Of the 522 responses received from FASB's constituents, 445 of them related to digital assets.

During its August meeting, FASB decided that "digital assets" was too broad a topic, and voted to focus specifically on cryptocurrencies for now.

During FASB's October meeting, it decided to propose that digital assets like cryptocurrencies be measured at fair value versus the more typical method today of cost minus impairment. FASB staff believes such an approach would better align the measurement of crypto assets with that of other assets used for investment purposes like financial instruments, which are also reported at fair value. This approach would also allow alignment between entities that currently use specialized industry or regulatory guidance that require fair value measurement.

Most recently, in its February meeting, FASB voted to formally issue the exposure draft. During this meeting, the board also considered additional scope questions, the role of "wrapped" tokens that effectively give someone a right to a certain amount of cryptocurrency (usually used for cross-blockchain transactions), the extent to which they should or should not specify the use of public blockchains, effective dates and transition methods, and whether private companies should get more time.

People have until June 6 to comment.