FASB issues final fair value guidance for crypto assets

Background

Under existing U.S. GAAP, many digital assets (for example, holdings of bitcoin and ether) are accounted for as indefinite-lived intangible assets under Topic 350, “Intangible Assets.” Both user and preparer stakeholders have expressed concern to the FASB that an intangible asset accounting model in which digital assets are measured at historical cost less impairment does not faithfully represent the economics of such holdings. Many of these same stakeholders asked the FASB to consider whether all or some subset of digital assets should be accounted for at fair value.

ASU 2023-08 addresses stakeholder feedback by requiring entities to measure certain categories of crypto asset holdings at fair value.

Scope

The scope of the ASU covers crypto asset holdings possessing all the following characteristics:

• The assets meet the definition of “intangible assets” as defined in the Accounting Standards Codification (ASC) Master Glossary.
• They do not provide the asset holder with enforceable rights to, or claims on, underlying goods, services, or other assets.
• They are created or reside on a distributed ledger based on blockchain or similar technology.
• They are secured through cryptography.
• They are fungible.
• They are not created or issued by the reporting entity or its related parties.

The scope of the ASU does not include crypto assets such as non-fungible tokens (NFTs), utility tokens that provide the holder thereof with rights to goods or services, or stablecoins that meet the definition of a financial instrument.

Crowe observation: Entities should carefully evaluate the scoping criteria of ASU 2023-08. As noted in the basis for conclusions, the criteria result in a narrowly defined scope relative to the wide range of digital assets in nature, origin, and purpose.

Notably, the final standard excludes any reference to “wrapped tokens.” The board’s original proposal indicated wrapped tokens would not qualify for fair value treatment because a wrapped token provides the holder with a right to, or claim on, another asset. In making the decision to remove reference to wrapped tokens, the board observed that holdings of these tokens were not identified as a pervasive issue and that their inclusion within the scope could delay the release of the standard. Entities with holdings of wrapped tokens will need to carefully consider the rights and obligations of such assets to determine if they are in the scope of the ASU.

The final standard also specifies that an in-scope asset must be created or must reside on a distributed ledger based on blockchain technology or other “similar technology,” reflecting the board’s desire to allow flexibility while differentiating in-scope assets from other digital intangible assets – such as software or media. In the basis for conclusions, the board also emphasized that the scope specifically excludes financial assets, including fiat currency and many securities (as defined under the ASC Master Glossary, as regulatory definitions of securities might differ).

While the ASU excludes crypto assets that are created or issued by the reporting entity, the basis for conclusions clarifies that crypto assets that are mined or validated by an entity are not considered to have been created by that entity. Accordingly, mined crypto assets fall within the scope of the standard, as long as the entity has no other involvement in the creation of the asset.

Finally, during previous deliberations, the board observed that the term “enforceable” used in the second scope criterion should not be interpreted to mean that an entity would be expected to obtain a legal opinion. In the basis for conclusions, the board observes that in many cases it will be clear whether a crypto asset provides a holder with enforceable rights to underlying assets.

Measurement

Crypto assets in the scope of the final standard must be measured at fair value at each reporting period, with changes in fair value recorded through net income. Entities must use the principles in Topic 820 to determine fair value.

In addition, in contrast to the original proposal, the final standard does not address how entities should account for transaction costs to acquire a crypto asset – for example, upfront commissions. Under the proposal, entities would have been required to expense upfront transaction costs unless otherwise required under other guidance (for example, under guidance applicable to investment companies).

Presentation and disclosure

Presentation

Under the final standard, in-scope crypto assets must be presented separately from other intangible assets on the balance sheet. The separate presentation requirement is intended to help investors understand the difference in measurement bases between in-scope crypto assets and other intangible assets measured at cost less impairment. Similarly, the ASU requires changes in the fair value of in-scope crypto assets to be presented separately in the income statement from changes in value (for example, impairment and amortization) of other intangible assets.

With respect to presentation in the statement of cash flows, the final standard provides application guidance to help entities determine cash flow classification in two particular instances. First, the ASU requires entities to classify as an operating cash flow the liquidation of crypto assets that are received as noncash consideration in the ordinary course of business and that are converted nearly immediately into cash. In this context, nearly immediately means “a short period of time that is expected to be within hours or a few days, rather than weeks.” Second, it requires that the liquidation of “crypto assets with donor-imposed restrictions that limit the use of those assets to long-term or capital purposes” be classified as cash flows from financing activities consistent with existing guidance in ASC 230-10-45-21A.

Crowe observation: Several stakeholders requested that the board include in the final standard guidance on whether gains or losses from in-scope crypto assets should be presented as operating or nonoperating income. The board ultimately decided not to issue specific guidance on classification of gains or losses from crypto assets as operating or nonoperating income, noting that the appropriate presentation could be affected by the nature of an entity’s activities and circumstances. 

Disclosure

Entities, including those subject to industry-specific guidance, must disclose the following at each reporting period:

• Crypto asset holdings. Entities must disclose the name, cost basis, fair value, and number of units of individually significant crypto assets held. Entities also must disclose the aggregate fair value and cost basis of other crypto asset holdings that are not individually significant.
• Restrictions. Entities must disclose the nature and remaining duration of any restrictions that apply to crypto asset holdings, the fair value of holdings subject to such restrictions, and the circumstances that would lift the restrictions.

• Cost basis method. Entities must disclose the method by which the cost basis of crypto asset holdings is determined.
• Gains and losses line item. If not presented separately, entities must disclose the line item in which gains and losses are reported in the income statement.
• Reconciliation. Entities must disclose a rollforward, in the aggregate, of activity from the beginning to end of the reporting period for total crypto asset holdings held for investment purposes, including additions, dispositions, and gains and losses. This reconciliation is not required to be tabular and may be disclosed in narrative form.

In connection with the reconciliation, an entity must disclose information about the following:

• The nature of activities that result in additions (for example, purchases or mining activities) and dispositions
• The total amount of cumulative realized gains and losses from dispositions
• If not presented separately, the line item in which gains and losses are reported in the income statement

Crowe observation: The ASU requires reconciliation only for assets held for investment purposes. Practically, this means entities do not need to include in the reconciliation crypto assets obtained as noncash consideration in the normal course of business and nearly immediately liquidated. 

Additionally, while cost basis is referenced throughout the disclosure requirements, the final standard does not prescribe a specific cost basis method. As such, entities have flexibility in determining the appropriate cost basis (for example, first-in, first-out; last-in, first-out; weighted average; specific identification; and so on) to use. 

Transition and effective date

All entities, both public and private, will be required to adopt the final standard in reporting periods (including interim periods) beginning after Dec. 15, 2024. Early adoption is permitted, including within an interim period. However, if an entity early adopts the guidance in an interim period, it must do so as of the beginning of the annual reporting period in which the interim period falls. For example, if an entity adopts in the second quarter of 2024, it must reflect the adoption of the new guidance as of Jan. 1, 2024.

The final standard must be adopted using a modified retrospective approach, recording a cumulative effect adjustment to equity (or net assets) at the date of adoption.