FASB addresses crypto asset presentation and disclosure

At its December 14, 2022 meeting, the Board reached decisions on crypto asset financial statement presentation and required disclosures. We summarize the Board’s crypto asset project decisions to date and what still lies ahead.

Applicability

• Entities with, or considering, investments in crypto or other digital assets

Relevant dates

• On May 11, 2022, the Board decided to add a project on the accounting for digital assets to its technical agenda.
• On August 31, 2022, the Board decided which digital assets and entities are in scope of the project.
• On October 12, 2022, the Board decided to require fair value measurement for in-scope crypto assets.
• On December 14, 2022, the FASB decided how crypto assets should be presented in the financial statements and what disclosures should be required.

Project scope decisions

• The scope of the project is digital assets that satisfy the following criteria:
  • Meet the US GAAP definition of an intangible asset
  • Do not provide the asset holder with enforceable rights to, or claims on, underlying goods, services or other assets
  • Reside or are created on a distributed ledger (i.e., blockchain)
  • Are secured through cryptography
  • Are fungible

This scope decision appears principally intended to capture digital assets like bitcoin and ether. However, we believe the above scoping criteria are intended to, and will, capture many other lesser-known and smaller (by market capitalization) digital assets.

• While one or more future accounting or disclosure decisions made by the Board may not apply to all entities (e.g., may not apply to certain entities that apply industry-specific US GAAP), the project’s scope would encompass all entities (i.e. public, private and not-for-profit, and across all industries).

Measurement of in-scope crypto assets

The Board reached the following decisions about the measurement of in-scope crypto assets:

• They should be measured at fair value, with fair value changes recorded in current period earnings (see "Presentation" below).
• Not to require or permit an alternative measurement, such as historical cost less impairment, for crypto assets not traded in an active market.
• Commissions, transaction fees and other charges incurred to acquire crypto assets should be expensed as incurred – unless other, industry-specific US GAAP (such as ASC 946 or ASC 940) applies, in which case the entity will continue to follow that guidance.
• That the above measurement decisions should not differ between public and private entities.

At numerous points, FASB members and staff referred to the accounting for crypto assets by investment companies under ASC 946 and broker-dealers under ASC 940. From those remarks, and together with the decisions reached, we believe those entities will continue to measure, and account for costs to acquire, crypto assets as they currently do under existing, industry-specific US GAAP.

Presentation

The Board made tentative decisions with respect to financial statement presentation. These requirements would apply equally to public and private entities. Investment companies subject to ASC 946 and not-for-profit entities subject to ASC 958 would continue to present their financial statements in accordance with those Topics, subject to minor conforming amendments.

• Balance sheet – Holdings of in-scope crypto assets should be presented separately from other intangible assets. Some Board members observed that guidance on current vs. non-current classification was not necessary; entities should apply existing US GAAP.
• Income statement – Gains and losses on crypto assets should be recorded in net income each period, separately presented from impairments or other changes to carrying amounts of other intangible assets.
• Statement of cash flows – Cash flows received from the sale, immediately or almost immediately after acquisition, of crypto assets received as non-cash consideration should be classified in cash flows from operations. Otherwise, no explicit cash flows guidance would be provided; ASC 230 provides adequate guidance.

Disclosure

The Board tentatively decided to require the following disclosures in entities’ annual financial statements. These requirements apply equally to public and private entities, and also apply to those entities that follow industry-specific guidance (e.g. ASC 946) to the extent not duplicative therewith.

• The disclosures required by ASC 820 (fair value).
• The entity’s crypto asset holdings at each reporting date presented, disaggregated by each significant holding (e.g. BTC, ETH, Litecoin). For each significant holding, the number of units held, cost basis (and how that was determined) and fair value.*
• A roll-forward of the entity’s crypto asset holdings, showing additions, disposals (by sale or otherwise), gains and losses, along with disclosure about the nature of the additions (e.g. purchases, mining or staking rewards) and/or disposals.
• Cumulative realized gains and losses, disaggregated so that realized gains and losses are presented on a gross, rather than net, basis.
• The fair value of any crypto assets subject to restriction, the nature and remaining duration of the restriction(s) and what conditions must be met to remove the restriction(s).*

* These disclosures would be required in both interim and annual financial statements.

Next steps

We expect the Board to complete its initial deliberations around this project, including making decisions about scope refinements, transition, cost-benefit and comment letter period for a proposed ASU in early 2023. At the recent AICPA & CIMA Conference on Current SEC and PCAOB Developments, the FASB staff said to expect a proposed ASU with a 75-day comment period in the first quarter of 2023.

Related projects

• The Board acknowledged certain similarities between many digital assets and commodities but decided (May 2022) to exclude commodities from the project’s scope because, unlike digital assets, physical commodities can also be used in the production of other physical products.
• The accounting for commodities remains on the Board’s research agenda and may be considered for addition to the Board’s technical agenda at a future date.

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