FASB’s New Crypto Fair Value Accounting Rule

The Financial Accounting Standards Board (FASB), the organization that sets accounting rules for U.S. companies, has issued an update to how businesses must account for and report their cryptocurrency holdings. This new standard is designed to give investors a more accurate and timely picture of a company’s financial position concerning these digital assets. The change moves away from a historical cost model to one that reflects the current market value of crypto.

The Previous Accounting Treatment for Crypto Assets

Before this update, accounting for crypto assets followed guidance for indefinite-lived intangible assets. This meant companies recorded cryptocurrencies on their balance sheets at their original purchase price. Under this “cost less impairment” model, if the market value of the crypto asset fell below its recorded cost, the company had to recognize an impairment loss.

This treatment had a significant drawback. For instance, if a company acquired Bitcoin at $50,000 per coin and its price dropped to $35,000, it would record a $15,000 impairment loss. If that same Bitcoin later increased in value to $60,000, the previous rules prohibited the company from recognizing the gain, and the asset would remain on the books at the lowered $35,000 value until it was sold.

This method was criticized because the inability to recognize increases in value could lead to an understatement of a company’s assets on its balance sheet. This discrepancy made it difficult for investors to assess the actual value of a company’s crypto holdings.

The New Fair Value Measurement Standard

FASB addressed these issues by issuing Accounting Standards Update (ASU) 2023-08. This new guidance replaces the previous cost-less-impairment approach with a fair value measurement model. Under this new standard, companies are required to measure their in-scope crypto holdings at their current fair market value at the end of each reporting period.

A key part of the new rule is that all changes in the fair value of these assets, both up and down, are now recognized directly in net income. This means that unrealized gains and losses will affect a company’s reported profits. For example, if a company holds Ethereum that it bought for $3,000, and its market price increases to $3,500 by the end of the quarter, the company will report a $500 gain. Conversely, if the price drops to $2,800, it will report a $200 loss.

This change provides a more dynamic and current representation of a company’s crypto asset portfolio. The new standard also requires that gains and losses from crypto assets be presented separately on the income statement from changes related to other intangible assets, ensuring clarity for financial statement users.

Scope of the New Standard

The new fair value accounting rule does not apply to all digital assets; its scope is carefully defined. For an asset to fall under this new guidance, it must be classified as an intangible asset, exist on a distributed ledger using blockchain technology, and be fungible, meaning each unit is interchangeable with another.

This definition means prominent cryptocurrencies like Bitcoin and Ethereum are within the scope of the new standard. The rule also specifies that the asset must not provide the holder with enforceable rights to underlying goods or services. Furthermore, the crypto asset cannot have been created or issued by the reporting company or its related parties.

The guidance explicitly excludes non-fungible tokens (NFTs), as they are unique and not interchangeable. It also does not apply to certain stablecoins that are redeemable for cash or pegged to another asset. Wrapped tokens, which are tokens on one blockchain representing an asset from another, are also not covered by this specific update.

Required Financial Statement Disclosures

The new guidance also mandates enhanced disclosures to give investors greater transparency into a company’s crypto activities. These disclosures must be provided in the footnotes of both annual and interim financial statements.

Companies are now required to disclose the following for each significant crypto asset holding, though this information can be aggregated for holdings that are not individually significant:

• The asset’s name
• Its cost basis
• Its fair value
• The number of units held

Companies must also provide a reconciliation of their crypto asset holdings from the beginning to the end of each reporting period. This reconciliation must show additions (purchases), dispositions (sales), and the gains and losses recognized in net income. If any crypto assets are subject to contractual sale restrictions, the company must disclose the nature of these restrictions, their duration, and the fair value of the restricted assets.

Effective Date and Transition

The new rules are mandatory for all entities, including private companies, for fiscal years beginning after December 15, 2024. This means that for companies with a calendar year-end, the standard will be effective starting with their 2025 annual financial statements and the interim quarterly reports within that year.

Companies are permitted to adopt the new standard early. If a company chooses to adopt the guidance early in an interim period, it must apply the changes as of the beginning of the fiscal year that includes that interim period.

The transition to the new standard is handled through a “cumulative-effect adjustment” to the opening balance of retained earnings. This means that on the first day of the adoption period, a company will calculate the difference between the fair value of its crypto assets and their previous carrying amount. This difference is recorded as a one-time adjustment to retained earnings, rather than requiring the company to go back and restate its financial statements from prior years.