FASB Decides on Fair Value Accounting for Crypto Asset Measurement

by Arthur · November 11, 2022

The Financial Accounting Standards Board said Wednesday that companies should use fair value accounting to measure bitcoin and other crypto assets, moving a step closer to a standard that could remove uncertainty about reporting how much such holdings are worth.

There are currently no specific accounting or disclosure rules for cryptocurrency assets, so businesses classify them as indefinite-lived intangible assets similar to intellectual property, such as trademarks. Companies must assess the value of such assets at least once a year and write it down if it falls below the purchase price. If the value rises, companies can only record a gain when they sell the asset, not if they continue to hold it.

Companies and accountants want the FASB to adopt fair value accounting instead, which would allow them to recognize losses and gains immediately and treat digital assets as financial assets.

The FASB said Wednesday that fair value accounting best captures the economics of cryptoassets and determined that the method would be a requirement rather than an option for companies. “We’ve heard from investors that they want transparency through disclosure, and the only way to get that is fair value,” said board member Gary Buesser.

The price of bitcoin, the world’s largest cryptocurrency by market capitalization, has fallen from a peak of nearly $68,000 in November to around $19,100 this month, according to data provider FactSet.

“The only way to get any kind of real information about the holdings of bitcoin or Ethereum is through fair value,” Buesser said. Ethereum is the second largest cryptocurrency by market capitalization.

Companies and investors have been asking the FASB for years for rules on how to account for and disclose crypto assets. The accounting standard setter began examining whether to establish new regulations in December, and in May added a crypto project to its technical agenda that sets regulatory priorities.

The current approach to accounting for digital assets requires businesses to prepare financial statements in a way that does not accurately reflect the results of their operations or financial condition, according to MicroStrategy Inc.

CEO Phong Le.

The Tysons Corner, Va.-based software company held about $1.99 billion in bitcoin as of June 30, down from about $2.89 billion at the end of March, according to regulatory filings. MicroStrategy bought another roughly 301 bitcoins between August and September, bringing the current value of its digital assets to about $2.5 billion.

“We expect the disconnect between the reported book value of our balance sheet and the fair market value of our bitcoin holdings to grow significantly over time,” Le said in a comment letter to the FASB last year, when he was MicroStrategy’s chief financial officer. officer.

This is due to the volatile nature of bitcoin and MicroStrategy’s inability to adjust for future increases in value, he said, adding that digital assets should be measured at fair value. The company declined to comment on the FASB’s decision.

MicroStrategy, the payments company Block Inc.

and the car manufacturer Tesla Inc.

is among the few publicly traded companies that have held significant bitcoin holdings.

New accounting rules in this area could change that or alleviate companies’ reluctance, said Deniz Appelbaum, assistant professor of accounting and finance at Montclair State University. “Without these standards for accounting and valuing crypto-assets, companies are reluctant to hold them,” she said.

The FASB in August detailed criteria for assets it would include in its cryptocurrency project, leaving out non-fungible tokens and certain stablecoins. The board will then consider what must be included in the information about the assets and how companies should inform investors.

The two topics are likely to be discussed by the end of the year, according to an FASB spokesman, and the board will then vote on whether to issue a proposal. He declined to comment on when that might happen.

Write to Jennifer Williams-Alvarez at [email protected]