Accounting Standards Update 2023-08: Intangibles—Goodwill and Other— Crypto Assets (Subtopic 350-60)
The Financial Accounting Standards Board (FASB) recently unveiled a significant development in the world of accounting with the publication of Accounting Standards Update (ASU) 2023-08, on December 13, 2023. Aimed at enhancing the accounting and disclosure practices concerning certain crypto assets, this update follows extensive feedback from stakeholders across various domains who emphasized the urgency of refining crypto asset accounting.
It aims to offer a clearer reflection of the underlying economics of specific crypto assets and an entity's financial position, all while streamlining the complexities and costs associated with existing accounting procedures.
ASU 2023-08 applies to assets meeting specific criteria, including being intangible assets, lacking enforceable rights to underlying goods or services, residing on a distributed ledger based on blockchain technology, securing through cryptography, being fungible, and not being created by the reporting entity or its related parties. Effective for fiscal years beginning after December 15, 2024, with early adoption permitted, these amendments mark a critical step towards aligning accounting standards with the evolving landscape of crypto assets.
In this post, we’ll walk through all of the details you need to know about this recent update from FASB, all from the digital asset accounting experts at Ledgible.
What?
What is this accounting standards update (“ASU”)?:
An entity holding crypto assets on their financials that meet certain criteria described below must measure those assets at fair value with changes recognized in net income for each reporting period. This practice must be done separately from other intangible assets on their financials as crypto assets will count as its own “class” of intangible assets.
Why?
Why is this ASU needed?:
According to GAAP, indefinite lived intangible assets are valued and adjusted using a cost-less-impairment method. This method writes down the value of assets using impairment expense over time as the asset depreciates in value. This does not adequately capture the appreciable nature nor the volatile swings of a crypto asset. Because of that fact, financial statements that included crypto assets being written down through impairment expense do not accurately depict the valuation of assets on a company’s balance sheet.
The FASB has implemented a fair value methodology that more accurately captures the volatile shifts (both appreciating and depreciating movements) of crypto assets. This will more accurately represent an entity’s financial position on their financial statements.
Who?
Who must adhere to the ASU?:
All entities that are holding crypto assets on their books (and are subject to ASC 350). Certain entities that are within the scope of the investment-company guidance in ASC 946 or are a certain type of broker-dealer are/have been already permitted to measure crypto assets at fair value.
When?
When will the amendments be effective?:
The effective date for a calendar year entity beginning 1/1/25 or a fiscal year entity beginning after 12/15/24 including all interim periods within those fiscal years.
Early adoption is allowed for both interim and annual financial statements that have not yet been issued (or made available for issuance). However, if an entity wishes to go the route of early adoption, they must do so as of the beginning of the fiscal year that it would like to start the adoption.
Which?
Which crypto assets are subject to the ASU?:
Any crypto asset that meets ALL of the following criteria:
1. Meet the definition of intangible assets as defined in the Codification.
“If no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of an intangible asset to the reporting entity, the useful life of the asset shall be considered to be indefinite. The term indefinite does not mean the same as infinite or indeterminate. The useful life of an intangible asset is indefinite if that life extends beyond the foreseeable horizon—that is, there is no foreseeable limit on the period of time over which it is expected to contribute to the cash flows of the reporting entity.”
2. Do not provide the asset holder with enforceable rights to or claims on underlying goods, services, or other assets.
3. Are created or reside on a distributed ledger based on blockchain or similar technology.
4. Are secured through cryptography.
5. Are fungible.
6. Are not created or issued by the reporting entity or its related parties.
The ASU goes a long way in answering questions about crypto assets such as bitcoin, ethereum, matic, avalanche, solana and others. However, there are still many questions to be answered for crypto assets that fail the 6 qualification test. Those include many that may fail item #2. Most notably stablecoins and wrapped tokens. These tokens can be seen as a claim to an underlying asset. For example, stablecoins as a pegged claim to a fiat currency (common examples include USDT and USDC). As well as wrapped tokens that “bridge” an original token on one blockchain over to a new blockchain so that it may interact and execute activity in a new ecosystem. This wrapped token can then be “bridged” back for the original token at any time (common examples include WBTC and WETH). Some professionals see these tokens as remaining with the “cost-less-impairment” treatment.
There is also further guidance needed for items that fail item #5 such as NFTs (Non-Fungible-Tokens) which usually have no readily available market value to write down its value accurately through impairment in accordance with ASC 350. Furthermore, NFTs may fail item #2 as well as they often may represent a claim to underlying goods, services, or other assets.
There are no mentions of wrapped tokens or stablecoins in this ASU.
How?
How are the valuations calculated and reported?:
Crypto assets on the balance sheet will be reported at fair value (whether higher or lower than original cost) both interim periods and annually. The corresponding fluctuations from report date to report date will be recognized as gains or losses on the income statement.
The crypto assets should be clearly separated from other intangible assets on the balance sheet and the gain and losses resulting from fair value adjustments should be clearly separated from other gains and losses on the income statement.
The amendments in this ASU require 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 in which an entity adopts the amendments.
Where?
Where on the financials are the valuations reported?:
The ASU will affect the Balance Sheet, Income Statement, and Statement of Cash Flows while also requiring new disclosures and attachments to the financial statements of the activity of each crypto asset and fair value adjustments recorded.
Ledgible and Digital Asset Accounting
Ledgible, founded in 2016, has been the trusted partner of choice for leading digital asset accounting firms and enterprises for the better part of a decade now. Over that time we’ve helped companies like FIS, Thomson Reuters, Mazars, Blockchain.com, and many others manage their digital asset tax, accounting, and compliance operations. As we look ahead to the changes from FASB and additionally the 1099 digital asset regulations that take effect in 2025 from the IRS, Ledgible remains the trusted partner of choice in this industry, and is ready to work with your enterprise, business, institution, and more in the digital asset accounting, tax, and compliance space. Reach out to our team to learn how we can help.
