FASB’s Fair-Value Crypto Accounting to Unlock Mainstream Institutional Investment?

Posted on nov. 10, 2022 | BLOG

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In a major milestone for mainstream institutional investment in crypto, the US’ Financial Account Standards Board (FASB) announced in early October 2022 that it would move toward endorsing fair-value accounting standards for cryptocurrency assets, allowing companies holding crypto to periodically update their balance sheets as prices fluctuate. This would mark a turn from crypto’s status as an indefinite-lived intangible asset requiring only yearly accounting updates.

The action by the FASB, which is a private body that the Securities and Exchange Commission (SEC) designates as the standard-maker for the accounting industry, should greatly increase the appeal of holding crypto on the balance sheet for large institutions, and allow them to more accurately reflect their gains and losses. Already, many in the crypto industry are cheering the impending move, although it is only preliminary for now.

Perhaps the most enthusiastic person about the news was former MicroStrategy CEO and noted Bitcoin maximalist Michael Saylor, who tweeted that the FASB decision was a “major milestone on the road to institutional Bitcoin adoption.”

What exactly is fair-value accounting and what would it mean for crypto?

Current crypto accounting standards

At the moment, crypto lacks specific accounting or disclosure rules, making it tricky for institutions to hold it in their portfolios. Its current classification as an indefinite-lived intangible asset means it is treated more like intellectual property than a financial instrument. With the new standards set to be promulgated by the FASB, that will change.

Crypto companies have long asked the FASB to devise clear standards for crypto assets. The body began researching the issue in December 2022 and in May put a crypto project on its technical agenda. In October, it told the Wall Street Journal that it would be moving forward with a plan to use fair-value accounting standards. That decision will be voted on by the FASB board before the end of the year, with the rule change likely to take effect in 2023.

Why are fair-value accounting standards so important for crypto adoption?

This means of accounting is the standard mode for traditional financial assets. It allows companies to record gains and losses instantly, which has an impact on financial statements and taxes. The phrase “fair value” refers to taking stock of a company’s assets and liabilities at their current market value.

The current accounting model used by companies holding crypto – to treat it as an “intangible asset” – often results in impairment loss. Companies are forced to report balance-sheet assets at their lowest price during a given period, even when the investment is in the green. The impairment loss then negatively impacts the earnings reports of these companies.

According to FASB board member Gary Buesser, “[The FASB] has heard from investors that they want transparency through disclosure, and the only way to get to that is fair value.” He added that it was the only true means of determining the value of cryptocurrencies like Bitcoin and Ethereum.

What is the scope of the FASB’s fair-value rule for crypto accounting?

The new rule will allow companies to account for the crypto on their balance sheets using fair-value methods. While it’s not yet been made explicit, these changes are expected to be handled through the earnings statements of companies. Transaction fees related to crypto will also need to be expensed immediately instead of capitalized and sorted into the cost basis of assets.

While the impact of the rule change will be felt widely, it will not impact every kind of digital asset. Only the assets that meet these criteria will have to use fair-value accounting;

  1. Adhere to the definition of an “intangible asset” according to the Master Glossary of the Codification
  2. Do not entitle their holders to enforceable rights or claims on underlying goods or services
  3. Exist on the blockchain
  4. Secured through cryptographic means
  5. Fungibility: non-fungible tokens (NFTs) will not be covered by the rule

How is the FASB’s new crypto rule being received?

The reaction to the new move by the FASB has far been overwhelmingly positive, as these changes have been a long time coming in the minds of many. Back in 2019, for example, the California Society of Certified Public Accountants called for the FASB to handle crypto as it would foreign currencies. Finally, with the new measure, the expectation is that it will be easier for institutions to enter the crypto space.

Anthony Tuths, of the “Big Four” accounting firm KPMG, felt the fair-value accounting change would be bullish for crypto. “FASB has just cleared the way for new accounting guidance which will allow most cryptocurrencies to be accounted for at fair value,” he said. “When this guidance goes into effect, it will greatly help smooth the way for broader mainstream adoption.”

Miles Brooks, director of strategy at the crypto tax firm CoinLedger, described the move as “long overdue,” adding that it would allow companies to more accurately report their digital-asset holdings.