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FASB Proposes Guidance on Crypto Assets, Reshaping the Industry Landscape

As the crypto industry evolves, it has moved from a rapidly growing and unregulated sector to a more standardized one. Various financial measures have been introduced for crypto assets, pushing the industry as a whole toward the next level of prosperity.

1.The New Standards Accelerate the Crypto Industry

As the size of the crypto industry expands, it has become a trillion-dollar global market. However, due to the increasing volatility of the industry, the existing accounting standards under Generally Accepted Accounting Principles (GAAP) are no longer sufficient to meet the development needs of the industry. Some practitioners have stated that under GAAP, crypto assets are accounted for as intangible assets. When the price of crypto assets drops sharply, these assets are considered impaired, and when the price rebounds, the resulting increase in value cannot be reflected in financial reports. This situation is a major drawback for regulatory agencies, internal management teams, and investors, as it does not provide effective decision-making information that resonates with the market in financial statements.

Based on this, the Financial Accounting Standards Board (FASB) released a proposal on March 23, 2023, which proposes new accounting standards for crypto assets. The proposal will be open for public comment on June 6th. If approved, it will become the first explicit accounting standard for crypto assets in US accounting standards, and will have an immeasurable positive effect on the crypto industry.

2.Analysis of the four key points of the new standard

So, what are the key points of this fresh first crypto accounting standard?

2.1 The scope of crypto assets has been clarified as the following six criteria:

  1. Must meet the definition of intangible asset;
  2. The holder of the asset does not have enforceable rights to claim or exchange underlying goods, services, or other assets;
  3. The asset is created and retained using blockchain technology based on distributed ledgers;
  4. The asset is secured using encryption technology;
  5. The asset is fungible;
  6. The asset is not created by the reporting entity or its affiliated companies.

2.2 The scope of the crypto accounting standard is clarified to include the following entities:

  1. Listed companies
  2. Private companies
  3. Investment institutions
  4. Non-profit organizations
  5. Employee benefit plans

2.3 Measured separately at fair value.

The new proposal states that the fair value of the entity’s holdings of crypto assets must be disclosed annually and the net increase in the value of these assets during the accounting year must be specified. Additionally, the cost of crypto assets, such as transaction fees and related costs, must also be disclosed.

2.4 Full disclosure of crypto assets

The new proposal suggests separating crypto assets from the intangible assets of the enterprise in the balance sheet and disclosing them separately based on fair value measurement; in the income statement, the fair value changes of crypto assets should be separated and presented separately from other intangible asset account value changes. Although this new proposal will not change the reporting requirements of the cash flow statement, if crypto assets are used as non-cash intermediaries in normal business processes (for example, crypto assets obtained by transferring goods and services to customers and immediately exchanged for cash), they need to be reported as cash inflows from operating activities in the financial statements.

In particular, FASB has clarified the requirements for off-balance-sheet disclosures for crypto assets, including the disclosure of significant holdings, restriction status, changes in fair value during the accounting period, and identification of any value changes caused by fluctuations in any of these factors.

(1) Significant holdings table: For annual and interim reporting periods, the entity should disclose holdings information for each significant crypto asset, including name, cost basis, fair value, and number of units held.

(2) Restriction Status Table: For annual and interim reporting periods, entities should disclose information on restrictions of crypto assets, including the fair value of restricted crypto assets, the nature and duration of the restrictions, and the circumstances that could cause the restrictions to lapse.

(3) Table of changes in crypto assets (Roll-forward): For annual reporting periods, entities should disclose a table of changes in balances from the beginning to the end of the period, providing separate information on the changes caused by additions (such as purchases, customer receipts or mining activities), dispositions (such as sales or payment of services fees), gains/losses (realized or unrealized).

3. More in line with industry characteristics to reduce risk and improve efficiency.

Based on the key information mentioned in the new proposal above, points three and four are the most important aspects of the proposal. They separate crypto assets from intangible assets and measure it at fair value, making it easier to track changes in fair value, transaction costs and holding costs.

Under current accounting standards, crypto assets are recorded as intangible assets. In a rapidly changing crypto market, if the carrying value exceeds the fair value, impairment losses must be recognized and the carrying value of the asset reduced. Even if the price later increases and the fair value of the crypto asset increases, the asset value and impairment loss cannot be reversed in accounting treatment.

To simplify, if A holds a crypto asset that drops from $10 to $8, accounting treatment will adjust the asset to $8. Even if the price later rebounds to $10, the accounting record will still show $8. This is highly problematic in the rapidly changing and unpredictable crypto market.

The new proposal separates crypto assets in the balance sheet and measures them at fair value, with fair value changes recorded in net income. Disclosure of significant holdings of specific crypto asset will also be mandatory in annual and interim financial statements, providing investors with more informative data to more accurately analyze and evaluate the risk of a particular crypto asset. This will also reduce the complexity of investment evaluation for investors and improve the efficiency of investment activities in the crypto industry.

Once the proposed accounting standards for the crypto industry are in place, they will be highly beneficial to industry practitioners, investors, and regulators. Richard Jones, Chairman of the FASB, stated that “the new proposal will make crypto holdings clearer to investors and make information such as the composition of crypto asset holders, transaction costs, and changes in fair value more transparent.”

4.Challenges of accounting compliance for crypto assets under the new standards.

Under the new accounting standards, there are many challenges and confusion for “veterans” in the crypto industry on how to keep up with the progress of the industry and align their own accounting systems with the upcoming crypto accounting standards. The main challenges include:

  1. The fair value of crypto assets is difficult to define, and the acquisition-hold-disposal process is complex.
  2. For crypto asset operating platforms (such as exchanges) or custodians, reporting of balance sheets and risk disclosures will be more rigorous.
  3. Traditional ERP systems or manual accounting using Excel cannot meet the real-time tracking requirements of crypto assets.

To address these challenges,, an on-chain accounting platform, is building a leading crypto asset accounting solution. Elven’s technology has gained the trust of globally renowned public sectors, accounting firms, crypto funds, exchanges, and crypto companies, providing the following support:

  • Accounting and financial reporting of crypto transactions that comply with GAAP (Generally Accepted Accounting Principles) or IFRS (International Financial Reporting Standards).
  • Support for merging and offsetting on-chain and off-chain data.
  • Audit permissions and working paper exports designed specifically for auditors.
  • Transparency and traceability of original on-chain transactions and accounting entries.
  • Scalability to handle millions of transactions.

We believe that with the clarification of regulatory rules, transparency in information disclosure, and the maturity of accounting tools, the crypto industry will emerge from the shadow of events such as the FTX and Terra scandals. The future progress of FASB and other regulatory agencies will mark a key milestone in achieving this goal. It remains to be seen how regulatory agencies and crypto players in regions such as Hong Kong and Singapore will adjust to respond to these changes.

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June 19, 2023
FASB Proposes Guidance on Crypto Assets, Reshaping the Industry Landscape