31 Oct
The new proposal by the FASB looks to scale up the adoption of digital assets by corporate and institutional bodies.
TLDR: The Financial Accounting Standards Board (FASB) meeting held on October 12th came to a few resolutions, which included cancelling out impairment charges that have made it difficult for businesses and companies to store their digital assets at fair value, that is, price volatility of digital assets should have been accounted for when determining impairment charges for holding digital assets. This latest update to the system will foster the adoption of digital assets for businesses and companies who want to store their income in digital assets at fair value.
While this change is exceptional, and companies are in haste to enjoy the benefits, the new proposal will only be effective in the first quarter of 2023.
What Impact Will This Proposal Have?
Existing crypto accounting standards about impairment have been a significant barrier to business use of digital assets. Corporate bodies find it difficult to track the value of their digital assets, which is valid reasoning for the price fluctuation of bitcoin and other cryptocurrencies since their inception. Last year, the entire cryptocurrency market suffered massive losses due to manipulation by the likes of Tesla’s CEO, Elon Musk. Without fair value, corporate and institutional bodies were subjected to severe impairments, which had adverse effects on their annual earnings reports. They had to record their digital assets at their lowest valuation, far below what they were worth when they purchased them.
The FASB’s meeting that concluded to eliminate impairment charges hopes to be the solution to this crisis affecting companies, at least giving them a good bet at storing digital assets.
What's Changing From What We Already Have?
Cryptocurrency assets, except for Non-fungible Tokens (NFTs), certain stablecoins and other tokenised assets, are classified as “intangible assets” under current accounting standards. Businesses are required to show an assessment record containing a costless impairment. This has been a problematic approach because businesses now have to disclose them practically at their lowest values with no flexibility to revalue them later because of the volatile nature of crypto assets. It distorts a company’s financial performance and, more crucially, it lessens the degree to which an outside audience may rely on these financials. The absence of clear accounting guidelines and guidance that appears unclear at best and misleading at worst has been a key complaint of the widespread use of cryptocurrencies.
The FASB’s new policy to regulate accounting for digital assets in financial records included
- measuring cryptocurrency value using the Fair Value Measurement system
- recognise market volatility at fair value in drafting income reports
- Accounting for the certain cost incurred from buying the digital assets.
What Is The Scope Of Assets Ready For Implementation?
It’s crucial to remember that only crypto assets that satisfy the scope requirements would be subject to the FASB’s modified fair value treatment. These crypto assets must meet the following requirements:
Comply with the Master Glossary of the Codification’s definition of an intangible asset as “a nonphysical asset or resource whose value to a business cannot always be simply recorded on a balance sheet.”
- Don’t grant the asset owner any legal or enforceable claims or rights to the underlying products, services, or other assets.
- They are built or stored on a distributed ledger, sometimes called a “blockchain.”
Are protected by cryptography.
- Are fungible, that is, “able to be substituted by another object that is the same or to be interchanged with it”
- The majority of cryptocurrencies will effectively be eligible for fair value assessment due to these scope limitations. NFTs (expressly excluded in criterion number 5), tokenised stocks or other traditional asset-backed tokens, and specific stablecoins would all be exceptions.
The public anticipates that the FASB’s policies will implement these adjustments within a timeframe spanning from six to twelve months. During this process, the FASB will need to meet again at certain times to finalise the details and information that will come with this change.
What Is The Next Course Of Action For The FASB?
Following is a fair estimate of what will occur next and what is required to reach a final ASU:
- The Board will convene several subsequent meetings to discuss the project’s crucial issues, including crypto accounting rules for presentation and disclosure.
- The Board will consider adoption and transition strategies for when businesses might implement the new guidelines and the details of the transition.
- The Board will publish an Exposure Draft for public review (typically, a comment letter period is between 30-90 days)
- The Board will analyse the feedback received on the Exposure Draft and take any necessary action.
- The Board will vote on this project’s entire body of work and issue a revised ASU.
Conclusion
Concerning new accounting standards that are especially suited to digital assets, the FASB is making significant strides. It’s just a matter of when before this change is formally adopted, but in the future, in-scope cryptocurrency assets will be reported at fair value. To guarantee they are prepared for the new advice when it is time, businesses should start planning for this impending transition immediately.
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1 Comment
Fletch Skinner
Nice post