On October 12th, 2022, The Financial Accounting Standards Board (FASB) reportedly reached a tentative decision on the measurement of corporate crypto assets, which will mandate the use of fair value of accounting instead of intangible asset accounting. This is a highly anticipated decision that seeks to provide clarity on how public entities in the U.S. should account for their holdings of crypto assets.
As it stands, the U.S. GAAP offers no authoritative guidance or rules that specifically address the accounting or disclosure for corporate investments in cryptocurrencies. In fact, on three separate occasions, the FASB rejected requests to set accounting rules for digital assets, citing that they are not pervasive enough to warrant explicit guidance. In the absence of definitive rules, the Big Four accounting firms and AICPA issued non-authoritative guidance between 2018 and 2019 suggesting that, under the current framework, crypto holdings best fit the definition of intangible assets following ASC 350, Intangibles–Goodwill and Other. However, all parties acknowledged that the accounting treatment recommended by this guidance is not ideal. With the rise of corporate crypto holdings, the limitation of the prevailing accounting becomes increasingly evident. For example, MicroStrategy Inc. disclosed an impairment loss of $194.1 million on its $1.9 billion of BTC holdings in its 2021 Q1 quarterly report. The company also disclosed sufficient inputs to calculate a total fair value of $5.1 billion for these holdings, or 2.7 times the balance sheet value. In this case, the use of intangible asset accounting sends mixed signals to financial statement users, as the disclosure of an impairment loss seems to be at odds with significant market appreciation in the same period.
In 2021, the FASB released an agenda consultation that publicly solicited comments on currently debated accounting topics including crypto accounting. The response was enthusiastic, and most commenters recommended that the board considers a fair value accounting approach in treating crypto assets as opposed to a historical accounting approach. For that reason, this tentative decision made by the board is a very welcomed development by the market, especially given the growing corporate interest in cryptocurrencies and the lack of accounting guidance in the past.
That being said, applying a fair value accounting approach to crypto assets is not as straightforward as one may think. First, unlike stock or bonds which are typically traded on centralized exchanges, most cryptocurrencies are decentralized so it is common to observe discrepancies in their pricing across different exchanges. Take bitcoin as an example: there is simply no standard or global price for bitcoin at any given point of time. As a result, most bitcoin price trackers, such as Google, calculate an average estimate or a recently traded price of bitcoin based on the transaction history of a prominent bitcoin exchange. Thus, in order to improve the comparability in companies’ application of the fair value accounting approach, the board will need to specify the fair value basis for crypto assets more clearly.
Second, not all crypto assets are created equal: while major cryptocurrencies (particularly bitcoin or ether) are mostly liquid and readily convertible to cash, non-fungible and other utility tokens are not always well traded. In fact, during the crypto winters where the market liquidity tends to dry up, some altcoins may not have any trade in a day, making it very difficult to determine their fair value. A recent study by Anderson, Fang, Moon and Shipman (2022) finds that companies with crypto assets, when left unguided before 2018, were more likely to adopt fair value accounting and provide fair value disclosures when the crypto markets were more liquid. This finding suggests that the fair value accounting approach may make sense only when a liquid market exists. Indeed, the Japanese GAAP recommends the use of a fair value accounting approach only for crypto assets traded on active markets but a cost accounting approach for those not actively traded.
In short, the board should take into account features of the crypto market and perhaps consider a modified fair value accounting approach that is based on the liquidity of crypto assets to avoid going from one extreme to another. At the very least, the board needs to be clearer about the fair value basis at which the companies should account for their crypto holdings.