FASB to Require Fair Value Accounting for Crypto

The Financial Accounting Standards Board (FASB) voted to require companies to use fair value accounting for crypto assets. The tentative decision addresses an increasing need for guidance on how businesses should account for crypto assets, and the eventual Accounting Standards Update issued after the decision will be the FASB’s first issuance of formal guidance in this area. The new accounting rules should better reflect the value of crypto assets, help companies prepare financial statements, and provide investors with greater transparency.

FASB Decision

At its October 12, 2022 board meeting, FASB voted to require crypto asset holders to use the accounting guidance in Topic 820, Fair Value Measurement. The FASB also decided to require an entity to recognize increases and decreases in the fair value of the asset in the entity’s comprehensive income for each reporting period and to expense rather than capitalize certain transactions fees.

Before deciding on fair value measurement, the FASB considered a historical cost measurement with a test for impairment at the end of the reporting period. The FASB also considered various measurement possibilities for crypto assets in inactive markets but decided not to pursue those alternatives. The board decided not to provide additional measurement guidance on the application of fair value measurement and decided against having a different measurement of fair value for private companies.

Prior Treatment

Prior to this decision, digital assets were generally accounted for as indefinite-lived intangible assets under Accounting Standards Codification (ASC) Topic 350-30, Intangibles – Goodwill and Other – General Intangibles Other Than Goodwill. This method requires crypto assets to be recorded at cost and then tested for impairment. The price volatility of digital assets, however, can make this accounting treatment difficult to apply. Many companies and practitioners argued that this accounting treatment was not appropriate for crypto assets.

The unique aspect of digital assets required new accounting rules that provide more specific guidance. In response, the FASB added the accounting and reporting of exchange-traded digital assets and exchange-traded commodities to its research agenda in December 2021 and to its technical agenda in May 2022.

Applicable Crypto Assets

During its August 31, 2022 meeting, FASB outlined the following criterial for crypto assets for the fair value measurement to apply:

• Meet the definition of “intangible asset” as defined in the Master Glossary of the Codification;
• 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 or “blockchain”;
• Are secured through cryptography; and
• Are fungible.

Next Steps

FASB will hold additional meetings to address other topics related to crypto currency accounting and reporting. It must then issue an Exposure Draft for public comment before holding a final vote and issuing a formal Accounting Standards Update.

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