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FASB Introduces Fair Value for Crypto Assets, Bringing Positive Signals to the Market

On Wednesday, 12th Dec 2023, the Financial Accounting Standards Board (FASB), a U.S. organization responsible for outlining guidelines on how companies should prepare financial reports, released a standards update. This update introduces many significant changes in the reporting of crypto assets that will be effective from Dec 2024.

Since the start of ASU's proposal, Elven has actively participated in the update. We submitted our comment letter during the process. We will provide an in-depth explanation of the new standard and its implications on the whole crypto market.

Who is Affected by this Update?

According to the Update file, it will apply to all entities holding assets that meet certain scope criteria.

For example, the updated standard will allow public companies such as MicroStrategy, Tesla, and payment processor Block to account for the fluctuations in the value of their cryptocurrency holdings.

Even for unlisted companies that hold crypto assets, whether U.S. incorporated or operating companies, or looking for investment from U.S. Investors need to adjust their reporting to the new standard.

Why is it good for the crypto industry?

In the past, if a company bought $1 million in Bitcoin and put it on its balance sheet, but even though BTC went up 20%, the company couldn't list the gain in its financial reports, and the price of BTC on its balance sheet remained at $1 million.

However, if BTC falls by 30%, the company would have to recognize the decline as an impairment in value and put the loss on its balance sheet.

Even if Bitcoin were to recover, the $700,000 in BTC would still be the book value on the company's balance sheet in the future, and the only solution would be to sell Bitcoin and trigger a capital gain.

That's the problem that companies like Micro Strategy or Coinbase have, which has prevented many companies from investing in Bitcoin and other crypto assets.

The introduction of Fair Value Measurement solved the problem above.

With fair value measurement, the gains and losses will be accurately recorded. Although the new standard will bring volatility to the earnings of companies that invest heavily in crypto assets, the disclosure of crypto assets in the financial reports can more appropriately reflect the impact of these assets and provide a better opportunity for business executives and investors to make better decisions.

For example, if some company's holding is worth 10 million USD Bitcoin, and the price of BTC doubles next year, then the gain from the raise will be reflected on the company's income statement.

At the same time, the new guidelines also establish the asset status of crypto assets, which can be directly accounted for, meaning that as a separate asset class, its status in government regulation and corporate finance is officially recognized.

Compared with the previous impairment test method, the fair value measurement method can more reasonably reflect the value of crypto assets with gain and loss, promoting enterprises' wider adoption of cryptocurrencies in investment and payment.

Also, the new disclosure of various types of crypto assets will help promote information transparency, protect investors, and avoid the emergence of the next FTX-like vicious incident caused by financial opacity.

How can I prepare for the new Standard?

Scope of Crypto Assets

The amendments in the Update apply to assets that meet all of the following criteria:

  1. Meet the definition of intangible assets as defined in the Codification
  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.

As a result, if you are holding NFT or 'wrapped' tokens like USDC only, then you will not be affected by the new standard. Otherwise, the following material needs your attention.

Fair Value Measurement

The changes introduced in the Update enhance the accounting treatment for specific crypto assets, mandating that an entity assess the fair value of these assets in each reporting period. As a result, you need to keep track of the current value of all the crypto assets you hold.

We know recording fair value is challenging and error-prone, so in Elven, we will help you track the fair value of crypto assets automatically. If you have your own price source, we can also adjust to your source.

Reporting Requirements

The Updated Standard requires three extra disclosures of crypto assets. In Elven, we have built-in reporting modules that could generate these disclosures.

Significant Holdings of Crypto Assets

This disclosure includes the name, cost basis, fair value, and number of units for each significant crypto asset holding and the aggregate fair values and cost bases of the crypto asset holdings that are not individually significant.

Restriction of Crypto Assets

For crypto assets that are subject to contractual sale restrictions, the fair value of those crypto assets, the nature and remaining duration of the restriction(s), and the circumstances that could cause the restriction(s) to lapse.

Roll forward of Crypto Assets

A roll forward, in the aggregate, of activity in the reporting period for crypto asset holdings, including additions (for example, purchases, receipts from customers, or mining activities), dispositions (for example, sales or payment for services), gains, and losses.

Gains and losses should be separately disclosed in the reconciliation because that information allows an investor to identify whether large gains are offsetting large losses during the period.

Data integration and update

Elven will integrate your different data sources and update your transactions automatically. Supported platforms are Payments, custodians, exchanges, OTCs, and other institutions; you can easily handle and reconcile cross-platform transactions(wallets, vaults, exchanges, bank, and financial accounts) in one system.

About Elven

Elven is a professional financial management software for digital assets. We offer one-stop solutions on top of the software, including bookkeeping, consulting, and auditing services for Web3 businesses and organizations. We have a professional R&D team that understands accounting and can quickly respond to your demand for iteration. Contact us if you want to prepare for the new standard!