Earlier this year, FASB published a proposed accounting standards update (ASU) governing how crypto assets are accounted for and disclosed in a company’s financial statement. These changes were deemed necessary to provide investors with more relevant information for decision-making while aligning the accounting approach to reflect more closely the economics of these assets. Specifically, companies would be required to measure certain crypto assets at fair value and measure changes to net income. Concurrently, broader disclosures about significant crypto holdings, including restrictions and changes, would also be required. While these are only proposed changes, the comment period closed on June 6, 2023, they do provide insights into potential changes. To help clients, prospects, and others, Selden Fox has provided a summary of the key details below.
Crypto Assets as Indefinite-Lived Intangible Assets
Under current U.S. Generally Accepted Accounting Principles (GAAP) rules, crypto assets are accounted for as indefinite-lived intangible assets. This means that the assets are not subject to amortization because there is no limit to the asset’s “useful life.” Instead of being amortized, these assets are tested for impairment, where the carrying value (what is recorded on the balance sheet) is measured against the fair value (what it could get on the open market if sold). If the carrying value outpaces the fair value, the asset is impaired and would be recorded as an impairment loss by the company, and the carrying amount would have to be reduced to the fair value. Once impaired, the carrying amount cannot be increased again until it is disposed of or sold, so reversal of impairment loss or increases of carrying amount on the asset are not allowed.
Assessing Cryptocurrency Assets at Fair Value
Under the proposed ASU, it would be mandatory to assess certain cryptocurrency assets at fair value in the statement of financial position during each reporting period. Changes in the fair value would also have to be recognized in net income. The proposed amendments focus on the importance of giving investors the information needed to better evaluate their risk and exposure. As a result, it is mandatory for organizations to provide improved disclosures at annual and interim reporting periods.
However, just because crypto assets are being treated as indefinite-lived intangible assets it does not mean that they will be measured in the same place on balance sheets. Instead, the proposed ASU would require crypto assets to be measured at fair value and recorded separately from other intangible assets. Fair value measurement changes in crypto assets also need to be presented apart from carrying amount changes for other intangible assets on an income statement. For nonprofits, they would be recorded separately in a statement of changes in net assets.
Required Information for Crypto Assets
The proposed changes would require companies to report certain information about crypto assets, including the name, fair value, cost, and number of units for each major holding. Companies would also have to report on the total fair value and cost of all crypto assets that are not major holdings. Under this guidance, entities would provide updates and reporting on cryptocurrency holdings annually. They would need to show what was added or sold, as well as any profits or losses they experienced. The proposed ASU states they would need to show the cost of their holdings.
Keeping track of additions, dispositions, gains, losses, and cost basis has been difficult for some entities. Fair value reporting of assets can be complicated, especially for companies that hold various types of crypto assets. Volatility and the illiquid nature of crypto assets can make it difficult to accurately estimate or judge value. There may be a need to work with outside experts or add new technology to meet the requirements proposed by FASB. Internal controls also need to be strong to ensure data is as accurate as possible.
Book Versus Tax Treatment
One issue that may make things more complicated for companies that own crypto assets comes from how the IRS currently treats cryptocurrency. For tax purposes, cryptocurrency is treated like property, and in taxes, unrealized gains or losses would not be recognized. This would make the financial records different from tax records (book versus tax).
With the enhanced disclosures FASB is proposing, the IRS may also have more information to enforce tax law compliance in relation to cryptocurrencies, so there would likely be more ripple effects coming out on the tax side as well.
How Should Companies Prepare For Pending Changes?
Companies should carefully evaluate these proposed changes to determine how they will be impacted when the new standard goes into effect. Once changes are adopted, companies may need to adjust quickly to new financial accounting standards and be prepared for any potential tax implications. Businesses that invest in crypto assets should be ready to provide necessary information.
The comment period on the proposed regulations recently closed. It is expected that FASB will review all feedback and decide whether to make additional updates before finalizing the ASU. If you have questions about the information outlined above or need assistance with an accounting or tax issue, Selden Fox can help. For additional information call 630.954.1400 or click here to contact us. We look forward to speaking with you soon.