The Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-08, Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets.
The ASU is intended to provide financial statement users with more decision-useful information by requiring certain crypto assets to be measured at fair value at each reporting period with changes in fair value recognized in net income resulting in a better reflection of their economics. The amendments also require disclosures about significant holdings, restrictions, and changes in those holdings.
The amended guidance applies to all entities holding crypto assets within the scope of the ASU, including public business entities, private companies, not-for-profit entities (NFP), and employee benefit plans.
Under current generally accepted accounting principles (GAAP), crypto assets are generally accounted for as indefinite-lived intangible assets in accordance with Subtopic 350-30, Intangibles—Goodwill and Other—General Intangibles Other Than Goodwill. This accounting results in the initial measurement of crypto assets at cost and subsequent impairment evaluation—referred to as the cost-less-impairment model.
Under this model, assets are required to be tested for impairment on an annual basis or when circumstances indicate the carrying amount of the asset may not be recoverable. When an identical digital asset is bought and sold at a price below the entity’s current carrying value, this will often serve as an indicator that impairment is more likely than not. If there is determined to be impairment, the carrying amount of the crypto assets is reduced to fair value and any subsequent increases are prohibited.
During the FASB’s 2021 agenda consultation process, stakeholders expressed concern that the cost-less-impairment accounting model doesn’t reflect the underlying economics or provide the users of the financial statements with decision-useful information as the subsequent increases in the value of crypto assets aren’t reflected in the financial statements. Feedback received also indicated that most stakeholders favored a fair value measurement model, which would align the accounting for crypto assets with the accounting for equity investments.
Stakeholders also requested additional disclosure about the types of crypto assets held by entities and the changes in those holdings.
Amendments in this ASU apply to assets that meet all of the following criteria:
- Meet the definition of intangible assets as defined by the codification
- Don’t provide the asset holder with enforceable rights 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
- Aren’t created or issued by the reporting entity or its related parties
A reporting entity that mines or validates and receives newly created crypto assets is not the creator of the crypto assets and therefore, the related crypto assets received in such circumstances would not be precluded from being within the scope of this ASU.
The amended guidance specifically excludes crypto assets that provide the holder with enforceable rights to or claims on underlying goods, services, or other assets. This scope exception was included to clarify that certain arrangements, such as contracts with customers, guarantees and insurance contracts, should continue to be subject to other GAAP and aren’t within the scope of this guidance solely because they involve crypto assets.
Although nonfungible tokens (NFTs) were excluded from the scope of this ASU, investor feedback indicated that material holdings of NFTs aren’t often encountered and if they were, their reported values may not impact investor decision.
The amended guidance requires entities to measure crypto assets meeting the above scope criteria at fair value in accordance with Topic 820, Fair Value Measurement, with changes recognized in net income at each reporting period.
The ASU doesn’t provide guidance on how to recognize or present transaction costs to acquire crypto assets. The amendments also don’t amend industry specific guidance for an entity that’s required to capitalize transaction costs.
Entities are required to present crypto assets measured at fair value separately from other intangible assets in the statement of financial position. Gains and losses from changes in the fair value are required to be presented separately from the changes in the carrying amounts of other intangible assets in the income statement—or statement of activities for NFPs.
When crypto assets are received as noncash consideration in the ordinary course of business—for example, in exchange for the transfer of goods and services to a customer—and are converted nearly immediately to cash, entities are required to classify those cash receipts as cash flows from operating activity in the statement of cash flows.
NFPs should classify cash receipts resulting from the sale of donated crypto assets that were converted nearly immediately into cash with no donor-imposed restrictions as operating cash flows. However, if the donor restricted the use of the crypto asset to a long-term purpose, cash receipts should be classified as a financing activity in the statement of cash flows.
The term nearly immediately when applying this guidance, refers to a short period of time that’s expected to be within hours or a few days, rather than weeks.
The amendments don’t otherwise change the presentation requirements for the statement of cash flows.
For annual and interim reporting periods, the amendments require entities holding in scope crypto assets to disclose the following:
- Name, cost basis, fair value, and number of units held of each significant crypto asset holding, as determined by fair value
- Aggregate fair values and cost basis of the crypto asset holdings that aren’t individually significant
For crypto assets subject to contractual sale restrictions, the fair value of those crypto assets, the nature and remaining duration of restrictions. The circumstances that could cause the restriction to lapse are also required to be disclosed for both annual and interim reporting periods.
The guidance doesn’t introduce any bright lines in the determination of what would be considered a significant holding for the purpose of separate disclosure. Use of the term should be consistent with other GAAP requirements.
In addition, for annual reporting periods, entities are required to disclose the following for crypto assets within the scope of the ASU, but may exclude crypto assets received in the ordinary course of business and those received as a contribution by an NFP:
- Aggregate roll-forward of activity including beginning and ending balances, additions, dispositions, gains, and losses (gains and losses included in net income for the period should be determined on a crypto-asset-by-crypto-asset basis)
- Total amount of cumulative realized gains and cumulative realized losses resulting from the dispositions during the period
- Description of the nature of activities that result in additions and dispositions
- If gains and losses aren’t presented separately, the income statement line item in which those gains and losses are recognized
- The method for determining the cost basis of crypto assets, such as first-in and first-out, specific identification, or average cost, etc.
The amendments are effective for all entities for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years.
Early adoption is permitted for annual and interim financial statements that haven’t yet been issued or made available for issuance. If an entity early adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes the interim period.
The amendments 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 the entity adopts the amendments.
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