Accounting & DisclosureCrypto

Valuing Crypto with Fair Value Accounting: Game Changer?

By October 20, 2022No Comments

How will FASB’s decision to require companies to report gains and losses in value influence corporate crypto plans?

The FASB’s decision in mid-October to require companies to use fair-value accounting for certain crypto assets (i.e., not NFTs) produced a generally favorable response from corporates that follow developments affecting crypto accounting and regulation. Whether it changes how other corporates consider crypto use cases is another question.

  • Until the FASB’s tentative board decision, companies treated crypto held on balance sheets as indefinite-lived intangible assets that must be written down if they decline but whose value can’t be raised until the asset is sold.
  • Under the FASB’s decision, corporates will be required to recognize gains and losses of crypto assets in comprehensive income during each reporting period; and to recognize certain costs incurred to acquire crypto assets, such as commissions, as an expense (except in certain cases).

Fundamental rethink. “This is a constructive change insofar as corporates willing or desiring to hold crypto would no longer be exclusively exposed to downside P&L risk,” one member whose company holds crypto assets said.

  • “Marking it to market, rather than treating it like an intangible asset, seems intuitive but also represents a fundamental rethink of the accounting treatment,” they added.
  • Michael Saylor, the founder and former CEO of MicroStrategy—which has purchased about 130,000 bitcoins worth about $2.5 billion—tweeted that the FASB’s move is “a major milestone on the road to institutional bitcoin adoption.”
  • Another member, whose company is active in the NFT space, said, “I don’t think it would be the primary driver to change the corporate mindset when thinking about NFT and metaverse initiatives; however, it will help to provide better guidance from a risk management perspective.”

Volatility as deterrent. One member said a corporate’s view of the FASB decision likely depends on the business case: “If their plan was to invest in crypto, then this ruling may definitely deter them from investing because of the volatility and the complexity of creating a robust accounting/controls environment to capture the changes in fair value, which may take a while to implement.”

  • They added, “Not to mention potential complexities around taxes for gains/losses, etc. External auditors would also put a lot of scrutiny around the corporate’s controls/processes to account for crypto.”
  • However, “if the corporate’s plan was to transact in crypto (including cross border payments) and not hold any on the balance sheet, then this ruling may not change their mind. The timing of crypto being held over month-end is something corporates would have to consider.”

Looking ahead. The FASB will next consider what will have to be included in disclosures about crypto assets and how companies should inform investors. The two topics will likely be discussed by the end of the year, according to a FASB spokesperson, and the board would then vote on whether to issue a proposal. They declined to comment on when that might take place.

  • And although this decision meets what some corporates had hoped for, it won’t necessarily change the opinion of crypto skeptics. One member said that while the accounting change “would solve one unattractive aspect of holding crypto, I don’t think this changes certain corporates’—and their shareholders’—inherent aversion to highly-speculative assets.”
  • The topic will be discussed at future meetings of NeuGroup’s working group on digital assets and Web3 strategies. You can find information on the group here. And to download a copy of A Treasurer’s Guide To Becoming Crypto-Ready, click here.
Justin Jones

Author Justin Jones

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