Historically, accounting for digital assets has been an incredibly challenging and time-consuming process for businesses. Some companies have been reluctant to invest in crypto for this reason; they don't want to spend time on earnings calls explaining their balance sheet.
However, digital asset accounting is becoming more approachable. The Financial Accounting Standards Board which sets authoritative accounting guidance under
Experts believe this guidance will spur more institutions to embrace digital assets, as the rules for proper accounting are more clear-cut. However, most companies will want third-party support from service providers that specialize in this emerging asset class to help navigate and ensure compliance with new and evolving guidelines. Here's what enterprises need to know about the new FASB guidance:
The fine print
At a macro level, the impact of the FASB update is clear: It will boost the legitimacy of digital assets, particularly in conjunction with other developments, such as the SEC's recent approval of the first spot Bitcoin ETF, which saw
The FASB guidance applies to intangible assets, as defined by the organization's
- Do not provide the asset holder with enforceable rights to or claims on underlying goods, services, or other assets;
- Are created or reside on a distributed ledger based on blockchain or similar technology;
- Are secured through cryptography;
- Are fungible; and,
- Are not created or issued by the reporting entity or its related parties.
However, it is worth noting that wrapped tokens, non-fungible tokens (NFTs) and issuer tokens are not formally within the scope of the guidance.
As a result of FASB's update, enterprises have much more clarity regarding how to report and measure digital assets on their books. Most notably, previous models for keeping such assets on the books only accounted for decreases in value until the asset was sold. In other words, digital assets on balance sheets were accounted for at their lowest valuation since the initial point of purchase, requiring impairment analysis to be performed on a regular basis. Many argued that this did not provide investors, lenders, and other stakeholders with "decision-useful information."
To address this concern, the guidelines now require businesses to measure digital assets at fair value each reporting period — essentially, the market price at the time of reporting. The new guidelines also require changes in an asset's fair value, both up and down, to be reflected in earnings. This improved balance sheet and income statement presentation will require companies to list digital asset holdings as separate line items from other intangible assets. FASB also acted on investor requests for additional disclosures. As part of these new disclosures, companies will need to disclose their significant holdings in any crypto assets (including the quantity held, cost basis and fair value) and an annual roll-forward of their crypto asset activity.
These new standards will go into effect for fiscal years that commence after Dec. 15, 2024, though early adoption is permitted now and encouraged for both interim and annual financial statements that have not yet been issued.
Implications
Fair value reporting has many benefits: It eliminates the need for impairment testing and allows any fluctuations in market value to be immediately recognized in earnings, which breeds greater transparency and decision-useful information — assuming, of course, the calculations are made correctly. Enterprises that hold digital assets on their books are advised, more than ever, to enlist the help of a trusted partner to ensure their calculations are accurate and the proper disclosures are filed.
Digital asset activity has always been highly scrutinized by auditors and investors, so companies need to ensure they have robust accounting systems in place. In addition, roughly half of corporate tax returns are reviewed by the IRS, so it's critical for enterprises to ensure they are getting the corporate tax calculations correct (in addition to accurate financial statements) and that they're using tools and software that the IRS will find acceptable. It's worth noting that regulations will likely continue to evolve, so it's important for organizations to "future proof" their digital asset accounting and corporate tax strategy. Choosing an experienced partner — one that can scale with and adapt to evolving guidance — can help companies meet the new FASB requirements while also ensuring they are prepared for additional updates down the line.
Looking ahead
Overall, the new FASB guidance better aligns the economic reality of digital assets with financial reporting, which ultimately lowers the barrier to entry. There are still many innate complexities associated with crypto accounting, but the right solution and partner can help ease the compliance burden and stay ahead of evolving regulations.
From a global perspective, this new guidance brings the U.S. GAAP treatment of crypto assets much more in line with the International Financial Reporting Standards set by the International Accounting Standards Board. As a result, this brings additional consistency and comparability to financial reporting on an international scale, affirms legitimacy, and enables the continued adoption of digital assets to global institutions.
