By: Amelia Hart, CPA, and Steve Sledge, CPA
An important goal of the Financial Accounting Standards Board (FASB) is listening to the concerns, insights and other feedback of stakeholders. One primary concern communicated by stakeholders via the 2021 FASB invitation to comment on the Board’s agenda related to crypto assets. Stakeholders requested guidance on accounting and disclosures related to digital assets. In response, the FASB chair added the topic of exchange-traded digital assets as a research project in December 2021. In May 2022, the Board unanimously voted to add accounting and disclosure for certain digital assets to its technical agenda.
On March 23, 2023, the FASB issued Proposed Accounting Standards Update, Intangibles – Goodwill and Other – Crypto Assets (Subtopic 360-60), Accounting for and Disclosure of Crypto Assets, with an invitation to comment that extends through June 6, 2023. The proposed standard would generally align the accounting for and reporting of crypto assets that meet six specified criteria. Some minor exceptions would apply to entities that follow industry-specific U.S. GAAP. Users would benefit from the enhanced disclosures in analyzing and assessing the exposure and risk related to significant crypto asset holdings by an entity. Practitioners and professionals, including internal and external experts, whether preparers, reviewers or attestors, would benefit from guidance that would support the goal of providing relevant and faithfully representational information.
This article provides a summary of the proposed ASU’s main provisions including (a) the crypto assets covered, (b) subsequent measurement of in-scope crypto assets, (c) the accounting, presentation, and financial statement effect of holding such crypto assets, (d) annual and interim period disclosure requirements, and (e) transition. We encourage readers to read the entire proposed ASU and to offer feedback as desired, using electronic feedback, email or a letter as provided for in the proposed ASU’s release, according to the FASB’s directives.
Proposed ASU: Scope
The proposed standard would apply to crypto assets that meet all of the following six criteria. The crypto assets:
- are classed as intangible assets according to the FASB Codification Master Glossary definition, which defines an intangible asset as an asset that lacks physical substance, not including financial assets;
- do not provide the holder with enforceable rights to, or claims on, underlying goods, services, or other assets;
- reside on a distributed ledger using blockchain technology;
- are secured through cryptography;
- are fungible; and
- are not created or issued by the reporting entity or a related party.
The proposed ASU would apply to all public, private and not-for-profit entities and across all industries; however, some of the proposed requirements would not apply to entities that apply industry-specific GAAP (e.g., Topic 946 on investment companies or Topic 958 on not-for-profit entities). The scope of the proposed ASU appears to be intended to capture digital assets like bitcoin and ether. However, it is also likely to capture many other digital assets commonly thought of as similar to those.
Out of scope
The proposed ASU observes that non-fungible tokens (NFTs) fail to meet the required fungibility criterion. The proposed ASU also states that digital assets subject to other, existing U.S. GAAP (e.g., a “stablecoin” that meets the definition of a financial asset) would remain subject to that other U.S. GAAP and not be in the scope of the new Subtopic. Finally, the basis for conclusions to the proposed ASU states that “wrapped tokens” are outside its scope.
Proposed ASU: Initial and Subsequent Measurement
The proposed Subtopic provides only limited initial measurement guidance, specifying that commissions, transaction fees and other acquisition costs be expensed as incurred (unless industry-specific U.S. GAAP specifies otherwise). Meanwhile, in-scope crypto assets would be measured after their acquisition at fair value with changes in valuation reported in net income.
Proposed ASU: Presentation of Financial Statements
The proposed Subtopic specifies presentation on the Balance Sheet, Income Statement (or Statement of Changes in Net Assets for nonprofits), and Statement of Cash Flows as follows:
- On the Balance Sheet: In-scope crypto assets reported separately from other intangible assets.
- In the Income Statement (or Statement of Changes in Net Assets): Changes in fair value reported separately from changes in the carrying amounts (e.g., impairments or amortization) of other intangible assets.
- In the Statement of Cash Flows: Crypto assets received in the ordinary course of business as noncash consideration and nearly immediately converted to cash required to be classified as Cash Receipts from Operating Activities. An example would be the near-immediate sale of crypto assets received in exchange for the entity’s goods or services.
Proposed ASU: Disclosures for Annual and Interim Reports
The following disclosures would apply to both annual and interim reporting by holders of the covered crypto assets based on the significance of the crypto assets held and any restrictions on such assets. Significance would be determined based on fair value.
- For significant holdings of crypto assets: The holder should include the name, cost basis, fair value and number of units for each significant crypto asset held.
- For holdings of covered crypto assets that are not considered significant: The holder should report the aggregate fair value and cost basis for these in-scope crypto assets.
- For holdings of covered crypto assets subject to restrictions: The holder should report the fair value of these crypto assets, as well as the nature and length of time of the restrictions and what would trigger a lapse of the restrictions.
Proposed ASU: Specific Disclosures for Annual Reporting
The following additional disclosures would be required only annually:
- A roll-forward of crypto assets’ activity, in aggregate, during the reporting period, showing additions, dispositions, gains, and losses. Narrative disclosure about the nature of the activities giving rise to the additions and/or dispositions would also be required.
- The sales price and cost bases of any disposed crypto assets.
- The method for determining the cost basis of the entity’s crypto assets.
Proposed ASU: Transition Requirements
The proposed ASU would require entities to record the cumulative effect of adoption as an adjustment to the beginning balance of Retained Earnings in the year of adoption.
The proposed ASU provides key insights into accounting for digital assets as these continue to rise in prevalence in the current economic environment. The FASB has indicated that once feedback is received and evaluated, an effective date will be determined. The comment period for this proposed ASU ends on June 6, 2023. Readers are encouraged to review the proposed ASU in its entirety and provide comment (positive or negative). An important goal of the FASB is listening to the concerns, insights and other feedback of stakeholders.
References
1 The FASB issued an Invitation to Comment, Agenda Consultation, on June 24, 2021.
2 The FASB Proposed Accounting Standard Update Topic: Intangibles – Goodwill and Other – Crypto Assets
(Subtopic 360-60), Accounting for and Disclosure of Crypto Assets is available at the FASB Website. bit.ly/41FFmJ9
3 FASB issues proposed ASU on crypto asset accounting (kpmg.us)
About the Authors
Dr. Amelia Hart, CPA, serves on the faculty of the Haslam College of Business in the Department of Accounting and Information Management at the University of Tennessee, Knoxville. She can be reached at ihart@utk.edu.
Steve Sledge, CPA, is a partner at KPMG LLP in Nashville. He can be reached at ssledge@kpmg.com.
This article was originally published in the May/June 2023 Tennessee CPA Journal.
