Crypto companies and other businesses holding significant digital currency assets will finally have clear accounting rules to measure the value of their Bitcoin, Ethereum, and other cryptocurrencies, as unanimously voted by US accounting standard-setters on Wednesday.
Understanding Crypto Accounting Rules
New rules, expected to be published by the end of this year, will mandate companies to report their cryptocurrency holdings at fair value. This measurement aims to capture the most current asset values, including rebounds in value following price dips. While these new standards might introduce earnings volatility for companies heavily invested in cryptocurrencies, they offer an improvement over current practices, as mentioned by companies and accountants, to the Financial Accounting Standards Board (FASB) over the past months.
FASB Uprights Cryptocurrency Accounting Rules
“It’s not often that we can both simplify the system and enhance the usefulness of information. This makes it an easy decision,” said FASB member Christine Botosan. The rules will take effect in 2025, but companies will have the option to apply them earlier, as agreed by FASB. The US accounting rulebook does not specifically address how companies like MicroStrategy Inc., Tesla Inc., or Coinbase Global Inc. should recognize and measure their digital currency holdings.
Effects of Temporary Drops on Crypto Market
Companies presently follow the American Institute of CPAs practice guide, which treats most cryptocurrency as an intangible asset, akin to trademarks and copyrights—rarely traded items. Consequently, companies record their cryptocurrency at the historical purchase price, assessing their holdings quarterly for impairments or value declines. Any temporary drop in Bitcoin’s price during a period is considered an impairment, and companies can’t adjust values upward if the market recovers.
This accounting method consistently impacts MicroStrategy, the largest public company holder of cryptocurrency. MicroStrategy’s CFO Andrew Kang emphasized that fair-value crypto reporting would give investors a more relevant financial picture and a better understanding of their Bitcoin holdings.
The accounting rules will be mandatory for all public and private companies starting in the fiscal years after December 15, 2024. This implies 2025 adoption for companies with calendar year-end fiscal years. FASB will formally publish these rules later this year.
Companies must now separate their crypto assets on their balance sheets to provide transparency about their crypto investments. Additionally, they must disclose significant holdings and any restrictions on these holdings in their financial statement footnotes. On an annual basis, they must reconcile their crypto assets’ opening and closing balances, categorized by type. Companies will not need to include information about crypto assets received as payments and immediately converted to cash in the reconciliation activity.
ASC 820 Compliance
As crypto will be measured at fair value, companies must also follow the disclosures required in the applicable accounting rule, ASC 820, ensuring transparency in measurement methods, per FASB’s agreement.
FASB had previously declined three separate requests to create crypto rules since 2017, citing the limited use of Bitcoin. Their stance changed when major companies like Tesla and MicroStrategy began investing in blockchain-based assets. FASB’s focus is narrow, covering assets created or residing on distributed ledgers based on blockchain technology and secured through cryptography. Non-fungible tokens (NFTs), stablecoins, and wrapped tokens are not included.
Scope of FASB’s Focus and Future Considerations
Many groups, including the Big Four accounting firms, urged FASB to include wrapped tokens in the final plan, arguing that they serve similar purposes and trade at similar prices to the underlying crypto assets. However, most board members narrowed the project to provide investors with information sooner. FASB has committed to monitoring the crypto market and taking further action if needed.
In conclusion, accounting rules for cryptocurrency holdings will soon provide transparency and better financial reporting for crypto companies and other businesses. These rules are a significant step toward mainstream cryptocurrency adoption, and companies must adapt to these changes. FASB’s commitment to monitoring the crypto market ensures that future adjustments can be made as necessary.
