On March 23, 2023, the Financial Accounting Standards Board (FASB) issued a proposed accounting standard for crypto assets (ASC 350-60: Intangibles – Goodwill and Other – Crypto Assets). Comments on this exposure draft are due by June 6, 2023. Currently, crypto assets are accounted for as indefinite-lived intangible assets at cost, and assessed for impairment annually or when a triggering event occurs. The proposed guidance in the exposure draft changes this accounting, and will provide more useful information about the economics of the crypto assets to investors. See below for a summary of the proposed changes:
The exposure draft will be applicable to crypto assets that meet all of the following criteria:
- Meet the definition of intangible asset as defined in the Codification Master Glossary.
- Do not provide the asset holder with enforceable rights to, or claims on, underlying goods, services, or other assets.
- Are created or reside on a distributed ledger based on blockchain technology.
- Are secured through cryptography.
- Are fungible.
- Are not created or issued by the reporting entity or its related parties.
Wrapped tokens are excluded from this proposed guidance as they provide the asset holder with rights to other assets. Additionally, nonfungible tokens (NFTs) are excluded from this proposed guidance as they are not fungible. Furthermore, an entity that creates its own coin or token will not be subject to this proposed guidance.
Recognition and Subsequent Measurement
Crypto assets that meet the above definition will be recognized initially at their transaction value (e.g., similar to how they are currently recognized). Crypto assets that meet the above definition will be subsequently measured at fair value with changes in fair value recognized in net income each reporting period. As such, no impairment assessments will be required as the crypto assets will be recorded at fair value.
An entity would be required to recognize transaction costs to acquire a crypto asset, such as commissions and other related transaction fees, as an expense as incurred, unless applicable industry-specific guidance requires that the entity capitalize those costs.
Crypto assets measured at fair value should be presented separately from other intangible assets in the balance sheet. The separate presentation may be by individual crypto asset holding or in aggregate (e.g., intangible asset class).
Changes in the fair value measurement of crypto assets should be presented separately from changes in the carrying amounts of other intangible assets in the income statement. For example, gains and losses of crypto assets should not be included in amortization expense or impairment expense of intangible assets. This does not necessarily mean they must be included in a separate line in the income statement; however, if they are not separately stated, the entity must disclose what line in the income statement are included in.
Statement of Cash Flows
Generally, there are no changes to the statement of cash flows unless crypto assets are received as non-cash consideration in the ordinary course of business (e.g., in exchange for the transfer of goods and services to a customer) and are converted nearly immediately into cash. Under this scenario, an entity would be required to classify those cash receipts as cash flows from operating activities. As to what is considered “nearly immediately”, the FASB expects this to mean hours or a few days.
Disclosures required for annual and interim periods include the following:
- The name, cost basis, fair value, and number of units for each significant crypto asset holding. Additionally, for crypto assets that are not individually significant, their aggregate fair values and cost bases.
- For crypto assets subject to restriction(s), the fair value of those crypto assets, the nature and remaining duration of the restriction(s), and the circumstances that could cause the restriction(s) to lapse.
Disclosures that are only required for annual reporting periods:
- For any dispositions of crypto assets in the reporting period, the difference between the sale price and the cost basis and a description of the activities that resulted in the dispositions (e.g., total amount of realized gains and losses from disposition).
- The method for determining the cost basis of crypto assets.
- If gains and losses are not presented separately in the income statement, the line item in which gains and losses are reported in the income statement.
- A description of the activities that resulted in the additions (e.g., sales) and dispositions (e.g., payment for services).
Additionally, crypto assets will be captured in ASC Topic 820: Fair Value Measurement disclosures. The fair value disclosures include three categories for inputs (level 1, 2, and 3), so judgment may be required for purposes of classifying crypto assets into the fair value hierarchy.
The transition requirements for this proposed guidance include the following:
- A cumulative-effect adjustment to the opening balance or retained earnings (or other appropriate components of equity or net assets) as of the beginning of the annual reporting period in which an entity adopts the proposed amendments.
- The cumulative-effect adjustment is calculated as the difference between the carrying amount of crypto assets as of the end of the prior annual reporting period and the fair value of those crypto assets as of the beginning of the annual reporting period in which the entity first applies the pending content.
- Early adoption is permitted upon issuance of a final Update, for any interim or annual period for which an entity’s financial statements have not been issued (or made available for issuance) as of the beginning of the annual reporting period.