By Mark D. Mishler, CPA
Cryptoasset holders — and the CPAs who advise them — have the opportunity to early adopt favorable new accounting rules that officially take effect from December 2024.
FASB Accounting Standards Update (ASU) No. 2023-08, issued in December 2023, significantly alters current accounting and disclosure requirements for certain cryptoassets. It creates a new subtopic within FASB ASC Topic 350, Intangibles — Goodwill and Other: FASB ASC Subtopic 350-60, Crypto Assets.
FASB’s new guidance, which goes into effect for fiscal years starting after Dec. 15, 2024, requires subsequent measurement of certain cryptoassets at fair value, with fair value changes recorded in net income in each reporting period. This significantly differs from current accounting for cryptoassets classified as indefinite-lived intangible assets, which are required to be measured at cost-less-impairment.
ASU 2023-08 also fortifies disclosures about the types of cryptoassets held by reporting entities and changes in those holdings. This will provide financial statement users (investors, lenders, creditors, and other capital allocators) with better decision-useful information about cryptoassets’ underlying economics, risks, cash flows, and financial statement impacts.
CURRENT ACCOUNTING
Current GAAP, unless otherwise provided in industry-specific GAAP (such as for investment companies), requires cryptoassets classified as indefinite-lived intangible assets to be accounted for using the cost-less-impairment model in FASB ASC Subtopic 350-30. This model recognizes only decreases, not increases, in cryptoasset values.
The cost-less-impairment measurement model requires annual impairment testing (and more frequent testing if events or circ*mstances indicate impairment is more likely than not). If the asset’s carrying amount exceeds its fair value, the difference becomes an impairment loss recognized in the current period that permanently reduces the asset’s carrying amount to its lower fair value. After impairment, GAAP prohibits subsequently increasing the asset’s carrying amount and reversing the impairment loss.
Reporting entities incur additional cost and complexity from the cost-less-impairment measurement model because they must develop an accounting process that monitors cryptoasset pricing information, tracks cryptoasset price declines, and assesses whether impairment indicators exist throughout the reporting period. Furthermore, a classification misfit exists because some cryptoassets trade frequently, which is not typical for most intangible assets.
SCOPE
ASU 2023-08 applies to all entities (public business entities, private companies, not-for-profit entities, and employee benefit plans) that hold cryptoassets meeting the following scope criteria:
- Meet the definition of intangible assets as defined in the FASB Accounting Standards Codification. FASB ASC Section 350-60-20 defines intangible assets as “assets (not including financial assets) that lack physical substance.” The term also refers to intangible assets other than goodwill.
- 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 or similar technology.
- Are secured through cryptography.
- Are fungible.
- Are not created or issued by the reporting entity or its related parties.
These are narrow criteria, meaning not all cryptoassets will meet these criteria in FASB ASC Paragraph 350-60-15-1. The following are examples of cryptoassets that would not meet ASU 2023-08’s criteria:
- Financial assets such as securities as defined in the FASB ASC Master Glossary.
- Other arrangements in digital form, such as contracts with customers, guarantees, and insurance contracts.
- Digital intangible assets such as software and media.
- Cryptoassets that provide the holder with rights to other cryptoassets (a cryptoasset with additional features not contained in the original digital token). An example is a wrapped token, which allows transacting bitcoin on the Ethereum blockchain. This may result in judgment for applying traditional intangible asset accounting guidance or other accounting guidance for the wrapped token even if the underlying cryptoasset meets the scope of ASU 2023-08.
- Nonfungible tokens (ASU 2023-08 applies only to “fungible” intangible digital assets because it is difficult to obtain market prices that meet FASB ASC Topic 820, Fair Value Measurement, fair value criteria for nonfungible digital assets; thus, it is unclear how to account for and disclose other types of digital assets, such as nonfungible tokens (NFTs)). Reporting entities accounting for NFTs need to fully understand the rights associated with these tokens and what the tokens transfer.
- Digital assets that the reporting entity (or a related party) has issued or created, even if the reporting entity obtained the digital assets from an unrelated third party. The traditional intangible asset guidance may still apply; a reporting entity that mines cryptoassets is not the creator because this is consideration for performing services if mining or validating is the only involvement.
MEASUREMENT
ASU 2023-08 requires measuring cryptoassets at fair value in the balance sheet and recognizing remeasurement changes in net income for each reporting period. This requires applying Topic 820 guidance to cryptoassets.
There are several areas of concern in applying Topic 820 for determining cryptoasset fair value. Reporting entities need to apply judgment when determining the fair value hierarchy level and in determining the principal (or most advantageous) market, especially if the market transaction volume decreases.
ASU 2023-08 is silent on recognizing transaction costs (commissions and fees) incurred to acquire cryptoassets. Reporting entities should treat transaction costs consistently with other industry-specific guidance that may require transaction cost capitalization. Regardless of whether transaction costs are capitalized or expensed, the effect on comprehensive income in the period that cryptoassets are acquired is the same because cryptoassets are subsequently remeasured at fair value.
Initial measurement is different, and ASU 2023-08 does not provide guidance. Initial cryptoasset measurement and recognition should follow FASB ASC Subtopic 350-30, General Intangibles Other Than Goodwill, or other GAAP. Determining the cryptoasset’s initial accounting measurement requires judgment to evaluate the nature of the transaction as to how the reporting entity initially obtains the cryptoassets.
As a result, a reporting entity may acquire and initially measure a cryptoasset at a different amount than its fair value at initial recognition.
Subsequently measuring the cryptoasset at fair value may result in recognizing a change from its initial measurement amount even though the asset’s fair value has not changed.
Fair value measurement provides several advantages compared with cost-less-impairment.
Examples are:
- Investors receive more transparent information about cryptoasset financial performance and management’s ability to manage cryptoassets.
- Investors also receive better decision-useful information about the value at which cryptoassets can be sold and changes in that value.
- The reporting entity benefits from reduced accounting cost and complexity by eliminating annual impairment testing that exists with current guidance and by more closely aligning cryptoasset accounting with existing industry-specific guidance (such as investment companies).
PRESENTATION
ASU 2023-08 requires presenting the accounting impacts for cryptoassets measured at fair value separately from other intangible assets that are not measured at fair value in the financial statements. Examples include:
- The aggregate amount of cryptoassets in the balance sheet. The holder is permitted to present cryptoassets on a more disaggregated basis (such as by individual cryptoasset holding or by intangible asset class).
- The income statement (or statement of activities for not-for-profit entities) gain or loss from carrying amount remeasurement changes for cryptoassets separately from other intangible asset amortization and impairment. This separation includes other digital assets that are not measured at fair value. Classification as operating or nonoperating income depends on facts and circ*mstances; for example, whether cryptoasset usage is for operating transactions versus investment purposes and whether cryptoassets are a core part of the business strategy.
- Operating cash flow classification from the “nearly immediate” sale of cryptoassets received as noncash consideration in the ordinary course of business (or a contribution for a not-for-profit entity). The ordinary course of business would commonly be revenue recognition receiving noncash consideration in exchange for goods and services transferred to a customer. The term “nearly immediate” refers to a short period of time that is expected to be within hours or a few days, rather than weeks. Entities should apply the guidance in FASB ASC Topic 230*, Statement of Cash Flows*, to appropriately classify cash flows related to other cryptoasset transactions, based on an entity’s facts and circ*mstances.
Because cryptoassets are measured and generate benefits differently from other intangible assets, separate presentation in the financial statements provides investors with relevant information about how management generates value from holding cryptoassets. This is especially important due to the historically high volatility of cryptoasset values.
DISCLOSURE
ASU 2023-08’s guidance fortifies disclosures about the types of cryptoassets held and any changes in those holdings. It also enhances disclosures for both annual and interim reporting periods, providing investors with relevant information to analyze and assess the exposure and risk of significant individual cryptoasset holdings. Topic 820 fair value disclosure requirements also apply for cryptoassets.
For annual and interim reporting periods, ASU 2023-08 requires (including an entity subject to industry-specific guidance) disclosing the following information:
- The cryptoasset name, cost basis, fair value, and number of units for each significant cryptoasset holding as well as the aggregate fair values and cost bases of the cryptoasset holdings that are not individually significant; and
- For cryptoassets subject to contractual sale restrictions, the fair value of those cryptoassets, the nature and remaining duration of the restrictions, and circ*mstances that could cause the restrictions to lapse.
For annual reporting periods, ASU 2023-08 requires disclosing the following information:
- A roll-forward reconciliation, in the aggregate, of cryptoasset holding activity during the reporting period. The holder must separately show:
- Additions and dispositions along with a description of the nature of activities that resulted in the additions or dispositions.
- The income statement lines containing realized gains and losses (if not already shown separately on the income statement).
- For cryptoasset dispositions during the reporting period, the difference between the disposal price and the cost basis along with describing activities that resulted in the dispositions. This is the total amount of cumulative realized gains and losses.
- The method for determining the cryptoasset cost basis (such as FIFO, specific identification, or average cost).
EFFECTIVE DATE AND TRANSITION
ASU 2023-08 applies to all entities and takes effect for fiscal years and interim periods therein, beginning after Dec. 15, 2024. It allows early adoption for both interim and unissued annual financial statements, with interim-period adoption requiring inclusive adoption from the beginning of the fiscal year that includes that interim period.
ASU 2023-08 requires a cumulative-effect adjustment to the opening balance of retained earnings (or other appropriate components of equity or net assets) as of the beginning of the annual reporting period of adoption.
BENEFITS TO REPORTING ENTITIES AND INVESTORS
FASB’s new requirement to measure certain cryptoassets (within the scope of ASU 2023-08) at fair value benefits both reporting entities and investors. For investors, it better reflects cryptoasset economics, risks, cash flows, and financial statement impacts. For reporting entities, it reduces cost and complexity by no longer applying the current cost-less-impairment accounting model. Because of these benefits, investors and CPAs should anticipate that most cryptoasset holders will early adopt ASU 2023-08 before the December effective date.
About the author
Mark D. Mishler, CPA, CMA, MBA, is a fractional CFO and principal at CFO Resource Management in Morristown, N.J., and an adjunct professor of accounting, finance, and management at Seton Hall University in South Orange, N.J., and Rutgers University in New Brunswick, N.J.For more information or to make a purchase, go to aicpa-cima.com/cpe-learning or call 888-777-7077.
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