The Financial Accounting Standards Board (FASB) has released new regulations that are set to redefine how companies holding digital assets like Bitcoin and Ethereum account for them. Under these new rules, companies will now have to measure their cryptocurrency holdings at their fair market value. This change, which is a significant departure from the current accounting practices, will come into effect for fiscal years starting after December 15, 2024. However, companies can choose to adopt these rules earlier if they wish.
Previously, firms like MicroStrategy, Tesla, and Block could only record the decrease in value of their crypto holdings, which often led to diminished earnings due to the volatile nature of cryptocurrencies. This one-sided accounting treatment has long been a point of contention for businesses with significant investments in digital currencies. The new FASB regulations, however, allow these companies to report both the highs and lows of their crypto assets, reflecting their most current market values in their financial statements.
FASB ushers in a new era of crypto accounting
The introduction of these rules marks a pivotal moment for the crypto industry. For years, there was no specific U.S. accounting rule addressing how companies should recognize and measure digital currencies. In the absence of dedicated guidelines, businesses not classified as investment companies resorted to treating cryptocurrencies as intangible assets, akin to trademarks and copyrights. This classification meant companies could only record gains if they sold their crypto holdings at a profit, leading to a skewed representation of their actual financial health.
The change in rules now enables a more comprehensive and transparent portrayal of a company’s financial status. Edward McGee, CFO of Grayscale Investments LLC, expressed enthusiasm about the new regulations, viewing them as a long-awaited “holiday gift of commonsense accounting.”
Impact and challenges ahead
With these new regulations, companies holding cryptocurrencies must make a separate entry for these assets in their balance sheets. They are also required to disclose significant crypto holdings and any restrictions on them in their footnotes for every reporting period. Annually, they must reconcile changes in the opening and closing balances of their crypto assets, categorized by type.
However, determining the fair value of crypto assets can be complex, as highlighted by PJ Theisen, a partner at Deloitte & Touche LLP. The process is not always straightforward, especially for certain types of cryptocurrencies, posing a challenge for companies in accurately assessing their value.
The scope of these new rules is deliberately narrow, excluding non-fungible tokens, stablecoins, issuer-created tokens (like those used by the now-failed crypto exchange FTX), and wrapped tokens. Nevertheless, the crypto industry has welcomed these changes, seeing them as a step toward standardization and increased investor confidence.
FASB’s decision to draft these rules comes after years of resistance, during which the landscape of cryptocurrency usage by companies evolved significantly. High-profile acquisitions of Bitcoin by companies such as MicroStrategy and Tesla, though Tesla later sold most of its holdings, played a part in changing FASB’s stance.
The new rules arrive amid heightened regulatory scrutiny of the crypto industry, especially following the collapse of FTX. Representatives like Brad Sherman have expressed skepticism about cryptocurrencies, questioning their place on company balance sheets.
In essence, the new regulations represent a significant shift in the accounting treatment of cryptocurrencies, offering a more balanced and transparent approach. While this move has been widely celebrated in the crypto industry, it also brings challenges and underscores the evolving nature of digital asset regulation and accounting. As companies and the accounting profession adapt to these changes, the crypto industry inches closer to mainstream financial recognition and legitimacy.