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Long-Awaited Bitcoin Accounting Rules to Capture Ups and Downs (2)
Crypto firms and other businesses with significant holdings of digital currencies will benefit from long-awaited accounting rules to measure the value of Bitcoin, Ethereum and other cryptocurrencies in their coffers, U.S. accounting standard setters have unanimously voted Wednesday.
Under new rules expected to be published by the end of the year, companies who hold or invest Cryptocurrency investors will be required to report their holdings at fair value, a measure that aims to capture the most recent value of an asset, including rebounds in value after a price decline. Even though the new standard will inject volatility into the earnings of companies heavily invested in crypto, the ability to record recoveries will be an improvement over last year. common practicebusinesses and accountants have been telling the Financial Accounting Standards Board this for months.
“It’s not very often that we can both reduce system costs and improve the decision usefulness of the information, and this makes it very easy to vote to do both,” said Christine Botosan, a member of the FASB.
The rules will take effect as early as 2025, but companies will have the option to apply them sooner, the FASB agreed.
“This is a big step forward for the entire crypto market. I think it’s a big step toward widespread adoption,” said Jeff Rundlet, head of accounting strategy at accounting software company Cryptio. “I see the finalization of this proposal to help large companies who may be afraid of holding cryptocurrencies on their balance sheet because they are afraid of the technical complexities.”
Gaps in the rulebook
No part of the U.S. accounting rules specifically addresses how companies like enterprise software companies MicroStrategy Inc., Car manufacturer Tesla Inc., or crypto exchange Coinbase Global Inc. should recognize and measure the digital currencies they own.
Firms currently default to a practical guide from the American Institute of CPAs that treats most cryptocurrencies as an intangible asset, a category that includes things like trademarks, copyrights and trademarks – so many elements which, unlike cryptocurrencies, are rarely exchanged. This means that companies record their cryptocurrencies at the historical price they paid and evaluate their holdings every quarter for depreciation or declines in value. If the price of Bitcoin declines, even briefly, during this period, it is considered depreciated. Companies cannot revise their values upwards if the market recovers.
This accounting method regularly weighs on the profits of MicroStrategy, the largest public company holding crypto.
Crypto fair value reporting “would allow us to provide investors with a more relevant view of our financial condition and the economic value of our bitcoin holdings, which would facilitate investors’ ability to make informed investment decisions and capital allocation”, MicroStrategy CFO Andrew Kang wrote to the FASB in May, in response to the original of the board of directors proposal.
The accounting rules will be mandatory for all companies – public and private – for financial years beginning after December 15, 2024, including interim periods during those years. This means adoption in 2025 for businesses at the end of the calendar year. Companies will be allowed to adopt the rules once the FASB formally publishes them later this year.
Companies are already required to present intangible assets as a line item on their balance sheet. Under the new rules, companies will have to make a separate entry for their crypto assets so that investors and other readers of financial statements have a clear idea of how much a company has invested in crypto.
Additionally, they will disclose in their footnotes each reporting period significant crypto holdings and any restrictions on those holdings. On an annual basis, they will need to reconcile – or disclose changes in the opening and closing balances – of their crypto assets, broken down by category. They will not need to include in the reconciliation activity information about crypto assets received as payments and immediately converted to cash, the FASB agreed on Wednesday.
Additionally, because crypto will be measured at fair value, companies will be subject to disclosures required by applicable accounting rules, ASC 820, so that financial statement readers know how companies established their metrics, agreed the FASB.
Long trip
The FASB has rejected three separate requests since 2017 to write rules for crypto, finding that too few companies use Bitcoin in a material way. The board changed its tune once major companies like Tesla and MicroStrategy began investing in the blockchain-traded asset.
The board kept its scope narrow, covering assets created or residing on distributed ledgers based on blockchain technology and secured by cryptography. Crypto assets must currently be classified as intangible assets, as defined by U.S. accounting rules, and fungible, meaning they can be exchanged with assets of the same type.
Non-fungible tokens, or NFTs – unique digital tokens that can range from music videos to digital sports trading cards – will not be covered by the rules. Stablecoins and wrapped tokens (digital tokens that allow cryptography from one blockchain to be used on another) are also not covered.
Several groups, including the big four accounting firms, pressed FASB to include wrapped tokens in the final plan, saying they are held for similar purposes and trade at similar prices to the underlying crypto assets.
On Wednesday, the majority of board members said they needed more information about the market before expanding the scope of the board’s work and rejected calls to include wrapped tokens .
“Intentionally keeping this project small really allowed us to get this information into the hands of investors sooner,” said FASB member Susan Cosper.
The FASB said it will continue to monitor the crypto market and take additional action if necessary.
“This will not and should not be the last crypto project; there should be other things to track,” said Aaron Jacob, vice president of business accounting at software company TaxBit. “This is the right first step.”