FASB Votes in Favor of New Fair Value Crypto Accounting

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Recognizing the growing importance and complexity of digital assets in the financial landscape, the Financial Accounting Standards Board (FASB) has voted in favor of updated crypto asset accounting guidance. 

As per the discussion at FASB’s board meeting, “entities with crypto assets within the project’s scope would subsequently measure those assets at fair value and recognize changes in the fair value in net income each reporting period.”

These entities will be required to separately present crypto assets from other intangible assets in the balance sheet. The income statement also needs to show gains and losses from crypto assets and amortization and impairments from other intangible assets. 

Also, entities are required to disclose significant holdings, cost basis, contractual sale restrictions, and a reconciliation of the activity from the opening to the closing balances of crypto assets.

This move aims to enhance transparency and provide a more accurate representation of crypto asset activities in financial statements.

Background and Motivation

On September 6th, 2023, the FASB, the authoritative body for accounting guidance under US GAAP, decided to move ahead with an updated crypto asset accounting guidance. 

This decision was driven by the need to increase transparency surrounding crypto asset activities. The primary goal is to ensure that companies are better prepared for the impending changes to crypto accounting requirements and understand the potential ramifications these changes might have on their business operations and financial statements.

Key Features of the New Guidance

The updated guidance specifically targets crypto assets that satisfy certain criteria. For a crypto asset to fall within this new accounting guidance's purview, it must:

• Be defined as an intangible asset.
• Not represent a contract or provide enforceable rights.
• Be created or exist on a distributed ledger rooted in blockchain or analogous technology.
• Be safeguarded through cryptography.
• Be fungible.
• Not be created or issued by the reporting entity or its associated parties.

Fair Value Treatment

One of the most significant shifts is the introduction of the fair-value treatment. Under this, crypto assets will be reported at their fair value, with any changes in this value reflected in earnings. 

This is a departure from the previous guidance where businesses were required to hold crypto assets at cost less impairment.

Exclusions

Notably, non-fungible tokens (NFTs) and issuer tokens are excluded from this project's scope and won't be eligible for the fair value treatment. 

Wrapped tokens won't fall under this new accounting guidance, meaning they will continue to adhere to the legacy intangible asset accounting treatment.

Presentation and Disclosure

Companies will now have to present their crypto activities on both their balance sheet and income statements as distinct line items. This ensures stakeholders can easily discern a company's crypto asset activities. 

New disclosure mandates have been introduced for crypto asset holdings and periodic activities to bolster transparency in financial reporting.

Implications and Next Steps

The FASB staff will now embark on the final drafting of the Accounting Standards Update (ASU). It's projected that this will be released in Q4 2023. While early adoption is an option, mandatory adoption has been set for December 15, 2024.

By integrating these changes, the FASB not only acknowledges the significance of cryptocurrencies but also ensures that financial reporting aligns more closely with the economic realities of holding such assets.

For businesses affected by these changes, it's crucial to understand the potential impact on their organization. This includes recognizing any gaps in current accounting and reporting processes and taking steps to address them.

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FAQs

1. What is the FASB's new decision regarding crypto asset accounting?

The FASB has voted in favor of updated crypto asset accounting guidance, aiming to enhance transparency and provide a more accurate representation of crypto asset activities in financial statements.

2. Which crypto assets fall under the new accounting guidance?

The guidance targets crypto assets that meet specific criteria, including being defined as an intangible asset, existing on a blockchain-based ledger, and being fungible. Notably, non-fungible tokens (NFTs) and issuer tokens are excluded.

3. How does the new guidance change the treatment of crypto assets in financial statements?

Under the new guidance, crypto assets will be reported at their fair value, with any changes in this value reflected in earnings. This is a departure from the previous practice where businesses held crypto assets at cost less impairment.

4. When is the mandatory adoption of the new guidance?

While the final Accounting Standards Update (ASU) is expected to be released in Q4 2023, mandatory adoption of the new guidance has been set for December 15, 2024. Early adoption is also an option for businesses.

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