FASB crypto accounting changes: a jargon-free guide
The FASB has voted to move forward with new guidelines for the way crypto assets such as Bitcoin are accounted for in the US.
Here’s a breakdown of the proposed changes, and what they mean for businesses that hold (or are considering holding) Bitcoin on balance sheet.
Who has proposed the changes and why?
The Financial Standards Accounting Board (FASB) is an independent body recognized by the Securities and Exchange Commission (SEC) as the United States’ designated accounting standard setter.
The FASB sets accounting standards for public and private companies and not-for-profit organizations that follow the US Generally Accepted Accounting Principles (GAAP).
The FASB and crypto accounting
Previously, the FASB had issued no specific guidelines on how cryptocurrencies such as Bitcoin should recorded and measured on the balance sheet.
But in December 2021, they announced a project to review how a certain subset of crypto assets are accounted for and reported on in financial disclosures such as quarterly and annual reports.
The crypto assets covered by this review have six characteristics, which are explained in this video by the FASB. Cryptocurrencies such as Bitcoin are included, but other assets such as NFTs are not.
In March 2023, the FASB released exposure documents for this proposed change. In other words, they published their proposal and asked for public comments. The comment period closed on June 6, 2023, and on 6 September, the board met to discuss the feedback received and issue tentative decisions.
The crypto assets covered by this review have six characteristics. Cryptocurrencies such as Bitcoin are included, but other assets such as NFTs are not.
How are cryptocurrencies currently accounted for?
Crypto assets such as Bitcoin are currently treated as an indefinite-lived, intangible asset, along with other non-physical assets such as trademarks and patents.
They must be accounted for using a “cost-less-impairment” model. Impairment is a reduction in the value of a company’s asset.
There are some exceptions for investment companies and broker-dealers, but otherwise, this means the following:
- Companies must record the cost basis (purchase price) of the asset.
- Each time the asset decreases in value (for example, when the price of Bitcoin drops) this must be recorded as a loss.
As discussed in a recent MicroStrategy World panel discussion with experts from Deloitte, this is a “one-way street”. The on-paper value of Bitcoin held by a company can be marked down, but not up, until it is sold - even if the price of Bitcoin rises in the interim.
What is the problem with the current system?
As the FASB noted in its media advisory of March 2023, this approach to accounting does not give clarity to potential investors. This is because the balance sheet value of a company’s Bitcoin holdings is unlikely to reflect its current market value.
Therefore, it can be hard to assess the financial health of a company that holds Bitcoin on balance sheet.
It can also be time-consuming and therefore expensive for companies to track the lowest identifiable price for a crypto asset within any given reporting period, including within the day.
What are the proposed changes?
The most headline-grabbing change in the FASB’s proposed Accounting Standards Update (ASU) is the move away from the cost-less-impairment model.
A move to fair value accounting
As Deloitte expert Amy Park has explained, it is important to note that the FASB is not proposing changing the categorization of Bitcoin. It will still be considered as an intangible asset for GAAP purposes rather than a currency or other financial asset.
However, they are proposing a change in the way that it is subsequently measured.
Under the proposed ASU, assets within the scope of the project would be subsequently measured at fair value instead of cost-less-impairment.
In other words, financial reports should reflect the current market value of any Bitcoin rather than its historical low during the reporting period. Current market value is defined as the exit price (the price to sell that asset) in the principal market.
What does this mean in practice?
A key issue is how to define “principal market” in this context. The FASB voted not to provide specific guidance on this, and instead refers to existing guidance in ASC 820 on Fair Value Measurement (PDF). Those guidelines are written for a general rather than crypto-specific context.
In effect, it is up to individual companies and their financial advisors how to identify the principal market. In a crypto context, there are some additional factors related to fair value measurements to consider. These include:
- Markets for crypto assets do not “close” in the way that traditional markets do. For example, crypto exchanges run 24/7 in a way that stock exchanges do not.
- There are multiple markets, and they don’t all have the same price.
Recording the fair value of a company’s Bitcoin holdings in the profit and loss statement would fulfill accounting and audit requirements. But what about tax?
As noted by Deloitte expert Rob Massey in a recent MicroStrategy World Tax and Accounting Panel, the rules on reporting for GAAP purposes do not always align with tax requirements.
In the US, the IRS regards crypto assets such a Bitcoin as property. For most taxpayers, a capital gain or loss for tax purposes isn’t recorded until such time as Bitcoin is used or disposed of.
This can result in a timing difference between GAAP and tax, which would generate a deferred tax asset or liability. Any deferred tax assets should then be evaluated for the need for a valuation allowance.
The complexities of this are beyond the scope of this article, but it’s important to note that accurate recording and tracking of the cost basis of any amount of Bitcoin a company uses or holds is the key to fulfilling both accounting and tax requirements.
Tracking the cost basis
The more granular this information is, the more control the company has over which tranches of Bitcoin to dispose of and when, for maximum tax efficiency.
This has been the case under the cost-less-impairment model and would continue to be the case under the fair value model.
The FASB notes in its exposure documents that “The Board decided not to provide specific guidance on how an entity should determine the cost basis of its crypto assets.”
There are various methods for determining cost basis such as FIFO (first in, first out) LIFO (last in, first out) and specific identification. Under the proposed amendments, whichever method a company uses, it will need to disclose it in financial statements.
Further, there are separate considerations relevant for tracking cost basis and implementing a proper method for tax purposes.
What other recommendations are included?
1) How to treat acquisition costs
The FASB board also deliberated how companies should treat the costs of acquiring crypto assets. Such costs include Bitcoin mining fees (the commission paid to the miner who confirms a Bitcoin transaction).
The options here were capitalizing or expensing. Capitalizing means including those costs as part of the value of the crypto assets on the company’s books. Expensing means treating those costs as regular expenses and deducting them immediately.
In October 2022, the board voted 4 to 3 that such costs should be treated as expenses under GAAP. Again, acquisition costs may have a different treatment for tax purposes.
2) Additional disclosure requirements
One of the parts of the proposed standard that a lot of people miss is all the additional disclosure requirements that are going to be required for companies that hold digital assets
Amy Park, Deloitte
While many stakeholders praise the move to a fair value accounting model, companies should be aware that there are other proposed amendments, such as the additional disclosure requirements. The FASB has proposed some additional reporting that companies will need to do on an interim and annual basis.
Full details are available in the exposure document (PDF), and affirmed in the tentative decisions document of September 6, but some information required would include the cost basis, fair value and number of units held for each significant crypto asset.
This is in addition to disclosing the method for determining cost basis (FIFO, LIFO etc) as discussed above in the section on tax implications.
There are also existing reporting requirements that come with a fair value measurement approach in ASC 820, such as recording the fair value hierarchy level, that would also be required. For more on this, see this helpful FAQ by the American Institute of Certified Public Accountants.
3) Year-end roll-forward or reconciliation
Another significant proposed requirement would be conducting a year-end roll-forward or reconciliation. In other words, comparing the balance of crypto assets and their value held at the start of the year with the year-end balance, taking into account any purchases, sales and unrealized gains or losses.
Again, the purpose is to provide investors or potential investors with “decision-useful” information and transparency into a company’s crypto asset holdings.
Next steps and timeline
The board voted unanimously to move ahead with the proposed changes, which means that they will now go a written ballot.
The board decided that the final Accounting Standards Update (ASU) should be effective for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years.
The board also affirmed that companies would have the option to implement the accounting changes early.
Bloomberg reports that the updated guidelines should be published by the end of the year.
How companies can prepare
Companies that have detailed, granular and automated reporting systems, along with rigorous internal controls, will be well-placed to weather the proposed transition to fair value measurement and its associated changes.
A digital asset treasury management platform such as Fortris, which integrates seamlessly with existing TMS and ERP software, can streamline the reporting process and satisfy accounting, tax, and audit requirements now and in the future.
Further reading: Bitcoin treasury management guide for finance teams