The SEC staff released Staff Accounting Bulletin No. 121 (SAB 121), which adds Section FF, Accounting for Obligations to Safeguard Crypto-Assets an Entity Holds for its Platform Users, to Topic 5 of the Staff Accounting Bulletin Series.
SAB 121 provides interpretive guidance for entities to consider when they’re responsible for safeguarding crypto assets held for their platform users and expresses the views of the staff regarding the accounting for obligations to safeguard crypto assets.
The interpretive guidance should be applied in financial statements covering the first interim or annual period ending after June 15, 2022, with retrospective application as of the beginning of the fiscal year in which the interim or annual period relates.
Key Provisions
The SEC staff noted an increase in entities providing platform users the ability to transact in crypto assets. These entities may be responsible for safeguarding the crypto assets held for its platform users, including maintaining the cryptographic key information.
The obligations associated with safeguarding crypto assets involve unique risks and uncertainties that can have a significant impact on the entity’s operations and financial condition. Accordingly, SAB 121 intends to enhance the information received by investors about these risks.
Recognition and Measurement
In accordance with SAB 121, when an entity is responsible for safeguarding the crypto assets held for its platform users, either directly or through an agent acting on its behalf, the entity should present a liability on its balance sheet to reflect its obligation to safeguard the crypto assets.
The safeguarding liability should be measured at initial recognition and each reporting date at the fair value of the crypto assets that the entity is responsible for holding for its platform users.
The entity should also recognize an asset at the same time it recognizes the safeguarding liability, also measured at initial recognition and each reporting date at the fair value of the crypto assets.
Disclosure
Notes to financial statements should include the following disclosures:
- Nature and amount of crypto assets that the entity is responsible for holding, including separate disclosure for each significant crypto asset
- Vulnerabilities the entity is subject to due to its obligation to safeguard the crypto assets
- Information about the entity responsible for holding the cryptographic key information, maintaining the recordkeeping, and securing the crypto assets from loss or theft
- Description and accounting for the safeguarding liability and corresponding asset, including disclosure regarding fair value measurements
An entity may also be required to disclose information regarding significant risks and uncertainty associated with holding the crypto assets outside of the financial statements, such as in the description of business, risk factors, or management’s discussion and analysis of financial condition and results of operation.
To the extent it’s material, the entity may need to provide disclosure outside its financial statements under existing SEC rules describing:
- Types of loss or additional obligations that could occur
- Legal ownership of the crypto assets and whether they would be available to satisfy general creditor claims in the event of bankruptcy
- Potential impact on the ongoing business and financial condition if the crypto assets were subject to destruction or theft
- Risk-mitigation steps the entity currently has in place
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