The Financial Accounting Standards Board voted at its
The FASB staff believes such an approach would better align measurement of crypto assets with that of other assets used for investment purposes like financial instruments, which are also reported at fair value, according to Lindsey Hoyer, a postgraduate technical assistant with the FASB. She said the approach would also allow alignment between entities that currently use specialized industry or regulatory guidance that require fair value measurement. Hoyer added that the vast majority of commenters believe this as well, saying 90% want fair value rules.
The board was unanimous in supporting the rule. Board member Gary Buesser said that, given the wild price swings within the digital asset space, fair value reporting is the best way to reflect the actual economics of the matter.
"We've heard from investors that they want transparency through a disclosure, and the only way to get that is through fair value. I'm looking at a chart for Bitcoin over the last year and three quarters, and it has ranged from $20,000 to $60,000 back to $19,000. The only way to get real information on the holding of [these assets] is fair value," he said.
The board also believed fair value reporting should be required, as opposed to simply giving entities the option to use it. Board member Christine Botosan said it made little sense to make it optional when the point of this whole project is to get some uniformity in reporting.
"I would make this a requirement, I would not allow it to be an option. We just got through talking about how fair value is better information and reduces costs for users and companies, and so I would really have a hard time justifying why, on an optional basis, we would continue to allow entities to choose to account for these assets under a cost less impairment model because it would reduce comparability for users," she said.
Similarly, the board uniformly agreed there should be no exceptions for an inactive market where a particular token is not actively traded, such as being able to continue to use the cost less impairment model or being able to say the fair value is 0. However there were some reservations.
Botosan, for example, felt that having the fair value of 0 when it's not actively traded made intuitive sense. When markets are inactive, she said, she would be hard pressed to conclude the fair value of the asset would be anything but zero. From a Level 2 hierarchy perspective, meanwhile, she said it would be difficult to say that one crypto asset that is actively traded and another that is not are similar, since the act of trading is a big part of their value. And from a Level 3 perspective, it would be difficult to say it's appropriate to apply a cost methodology because if one can't recover the costs, they can't justify using that cost for an estimate of fair value, and if the asset isn't traded, there's no way to know the intrinsic cash flows, meaning an income approach gets the value back to zero as well.
"But I admit, that is my opinion and there are experts out there dealing with these issues and it's really an issue for the entity, its auditor and its regulator to ultimately make decisions within the confines of the existing model, so I'd prefer not to provide additional guidance here, so I also agree with the staff recommendation," she said.
One area where the vote was not unanimous was the question of whether these assets should be capitalized or expensed, particularly in the case of other business costs like bid/ask spreads and due diligence. Voting for a capitalization approach was Botosan, Frederick Cannon and Gary Buesser. Cannon said such an approach better reflects the actual economics of the assets.
"I think capitalization does better reflect the holding gains and losses than expensing," he said. "I think this is why the investment companies have that accounting — they capitalize it because it is a better reflection of gains and losses in the holding period and I think today while these are classified intangibles, the economics of what folks are doing is very analogous to the investment company approach, which is how can we best measure the holding gains and losses."
Board member Marcia Hunt, on the other hand, said they have agreed so far to support a fair value model, so it was difficult for her to see how an amortized premium or discount or other types of costs are meaningful in the long run "because of the fair value mark to the asset at the end of the day."
"So I was comfortable with expensing, but I also understand that while that may be a direction it takes some careful wording about how we make that clear within the framework … I think of this more along the lines of we have one asset with one value and I'm focused on Day 2 accounting more on Day 1 accounting, which is why I feel expensing gets us to a meaningful income," she said.
Ultimately, the vote ended in a tie. FASB Chair Richard Jones asked if anyone would like to change their vote. Board member Jim Kroeker, who previously said he would decline to weigh in on the matter, decided eventually to vote for expensing.
"I think bid/ask spread is a transaction cost economically, but if we say excluding bid-ask spread, I can live with expensing," he said.
The board also agreed there is no need for private company exceptions and modifications so far.
This is the latest in a series of recent decisions by the FASB on treatment of digital assets. Most recently, the board in August voted to
Accountants reacting well
The news was welcome to accountants in the digital asset space, who said that a shift to fair value would be more useful to investors and easier for preparers. In fact, Mark DiMichael, a Citrin Cooperman partner who leads the Top 100 Firm's digital assets practice, said this should have been done ages ago, as the current procedures don't make as much sense.
"I think it's a no-brainer. I'm very happy they decided to do that. I think they waited way too long to do it! They should have done it a long time ago. The price and value of crypto assets is, for most of them like Bitcoin, so easy to obtain it's kind of obvious it should be fair value," he said. " The way the rules were before were not well designed for something like this."
Patrick Camuso, founder of Camuso CPA which specializes in blockchain, cryptocurrency and metaverse issues, agreed, saying that the current treatment does not accurately reflect the nature of these assets because the rules as written are more for things like patents and other intellectual property.
"Intangible accounting did not reflect the overall nature of cryptocurrency assets which share more similarities with financial assets than intellectual property and other intangible assets. The intangible accounting approach did not provide the best method for companies to prepare financial statements in a manner that reflected their current financial condition," he said.
Sean Stein Smith, a CPA and Lehman College professor who is the founder of the Institute for Blockchain and Cryptoasset Research, agreed, finding it encouraging that, after many years, FASB finally is taking the initiative on this issue.
"This is an excellent first step toward the development of consistent, comparable and relevant accounting standards for the cryptoasset space. After years of requests from the accounting profession, as well as major players in the crypto space, the FASB seems to be recognizing the importance of providing leadership in this space. Several steps remain before this becomes authoritative accounting guidance, and there are certain cryptoassets that have been excluded from this current round of research and rule-making, but this is definitely a positive development," he said.
The decision, it is believed, likely won't require a great deal of accounting work. Smith pointed out that most firms have already been tracking the fair market value of crypto holdings anyway.
"This seems to me as more of an instance of rulemakers catching up with the realities of an asset class and marketplace that has rapidly moved from the fringes to mainstream financial conversations," he said.
In fact, said DiMichael, entities will likely find this method even easier than other approaches in use today, such as the aforementioned cost less impairment model.
"For companies that have had to take impairment losses, it will be much easier for them to do the accounting for it because before they had to write things down lot by lot — so if they bought Bitcoin on 50 different occasions, and some of those were impaired and some were not, they needed separate schedules to track these impairment charges and when they have been released. So it was a big headache for them under the old system. This will make it a lot simpler," he said.
Camuso agreed, saying that this will simplify the accounting around crypto assets, and added that it will also lead to more transparency because companies will be able to more accurately represent the fair value and overall economics of the volatile assets they own.
"As someone that is excited to see crypto gain wider adoption, I am pleased with this accounting change. I expect these new accounting rules will make many companies reconsider holding digital assets on their balance sheet since there will no longer be a discrepancy between the fair market value and reported carrying value of their crypto assets," he said.
