The Financial Accounting Standards Board’s recently released proposed guidance aims to “improve the accounting for and disclosure of certain crypto assets,” but there are still several unanswered questions, say Nik Fahrer and Anne Coughlan of FORVIS.
What do MicroStrategy Inc. and Tesla Inc. have in common? They both own thousands of bitcoin. Despite both being publicly traded companies, how they account for that bitcoin in their financials has created controversy and generated headlines.
The Financial Accounting Standards Board’s proposed guidance, released March 23, aims to “improve the accounting for and disclosure of certain crypto assets.” When it sought comments from stakeholders in June 2021, the FASB received an overwhelming number of responses seeking clarity on crypto accounting and reporting. That December, FASB Chair Richard Jones added a project to explore accounting for and disclosure of crypto holdings.
Current guidance states that companies should classify crypto as long-lived intangible assets in accordance with FASB Accounting Standards Codification Topic 350. Businesses that don’t qualify as investment companies should record cryptocurrency at historical cost and only adjust it if the fair value declines. Once holdings are written down, companies can’t revise the value back up if the price recovers.
This accounting often doesn’t reflect the economics or the nature of how a company is using digital assets. Many market participants believe it limits overall transparency and comparability of financial reporting information.
Though the FASB proposal has a narrow scope, it represents a significant milestone. Crypto assets covered by the exposure draft include those that:
The proposal doesn’t cover items such as:
According to the new proposal, crypto assets would be measured at fair value under ASC 820, Fair Value Measurement, with any changes in fair value reported in comprehensive income each reporting period. Certain costs incurred to acquire crypto assets, such as commissions, would be recognized as an expense unless a company follows specialized industry measurement guidance that requires otherwise.
The aggregate amount of crypto assets would be presented separately from other intangible assets that are measured using other measurement bases. Gains and losses on crypto assets would be reported in net income separately from the income statement effects of other intangible assets, such as amortization or impairments. Crypto assets received as noncash consideration during the ordinary course of business that are converted nearly immediately into cash would be classified as operating cash flows. Finally, disclosures would mirror those in ASC 820 with a few added disclosures to capture the types of significant crypto assets held, activity, and any restrictions on sale.
Following the current accounting model, companies mark down the value of their crypto to the lowest fair value observed during the holding period. This reduces net assets and requires companies to record an impairment expense that reduces net income.
When or if the fair value of the crypto goes back up, the company isn’t permitted to increase the value of the asset on its balance sheet; the value of the crypto on its balance sheet remains at the lower value despite its higher trading value. These effects often paint a distorted picture of a company’s financial results and may dissuade companies from holding crypto assets at all.
For example, Tesla bought bitcoin in the first quarter of 2021. Because of a decline in the value of bitcoin, its holdings are now valued at less than the original purchase price. As a result, Tesla recorded $305 million in impairments of its crypto since the purchase date.
This doesn’t mean it sold and lost $305 million worth of bitcoin or that its bitcoin was worth $305 million less at the end of 2022. What it does mean is that in the past couple of years, Tesla’s bitcoin holdings declined in value by $305 million, which presumably reflects a write-down to the single lowest bitcoin price over that period. The markdown was included as an impairment expense on the income statement, meaning Tesla reported lower earnings per share than if it hadn’t purchased bitcoin.
Under the existing rules, if bitcoin were to recover to $65,000 per coin in 2023, Tesla wouldn’t be allowed to increase the value of its bitcoin to $65,000, despite having the ability to sell on the open market and realize substantial gains (which it did to the tune of $192 million over the same period). It’s a lose-lose situation from a financial reporting perspective.
The new FASB proposal is widely seen as a step in the right direction for companies that hold crypto, but there are still several unanswered questions. For example, how does a company treat stablecoins, NFTs, wrapped tokens, or governance tokens?
For the time being, the industry likely will have to chalk up FASB’s new guidance as a win, albeit maybe not the resounding blow-out win they were hoping for when this first started. Next up: the 75-day comment period on the exposure draft.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Nik Fahrer serves as a national tax senior manager in FORVIS’ national office and leads the digital asset tax team. He assists with implementation and support of the firm’s technology and growth initiatives.
Anne Coughlan is the assurance content strategy leader for FORVIS. She provides technical research and incorporates regulatory intelligence into in-depth articles and guidance, marketing materials and course development.
We’d love to hear your smart, original take: Write for us.
To read more articles log in.
Learn more about a Bloomberg Tax subscription.
