Accounting Standard Update Addresses Crypto Assets

Except for certain specialized industries (for example, investment companies), legacy GAAP requires crypto assets to be accounted for as indefinite lived intangible assets using a cost less impairment model. However, this model of accounting does not provide relevant information to investors and stakeholders regarding the economics of crypto assets or their impact on an entity’s financial position, including risk exposure.

Based on stakeholder feedback, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-08, Intangibles – Goodwill and Other – Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets (ASU 2023-08) as a meaningful step toward addressing the feedback surrounding financial reporting and disclosure of crypto assets.

Effective Date and Transition Considerations

The ASU is effective for all entities for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted for annual and interim financials that have not yet been issued or made available for issuance. If early adopted in an interim period, the entity must adopt the ASU as of the beginning of the fiscal year that includes that interim period.

Transition requires a cumulative-effect adjustment to the opening balance of equity as of the beginning of the annual reporting period in which an entity adopts the amendments.

• Practice Note: No exceptions or practical expedients are currently available to private companies with respect to the amendments in this ASU.
• Practice Note: When reporting entities are evaluating whether to early adopt, they should also consider income tax-related implications associated with reporting crypto assets at fair value.

Main Provisions of ASU 2023-08

Applicability and Scope

The ASU is applicable to all entities (PBEs, private companies, NFPs, and employee benefit plans) holding assets that meet ALL the following scope criteria:

1. Meet the definition of intangible assets as defined in the Codification
2. Do not provide the asset holder with enforceable rights to or claims on underlying goods, services, or other assets
3. Are created or reside on a distributed ledger based on blockchain or similar technology
4. Are secured through cryptography
5. Are fungible
6. Are not created or issued by the reporting entity or its related parties

The FASB determined that other crypto assets outside of the above criterion were either not yet pervasive enough to require immediate attention, or because of applying the amendments, could result in consequences that had not yet been fully evaluated.

The narrowly defined scope addresses the most immediate needs of stakeholders while at the same time allowing for timely issuance of the ASU.

Practice Notes

• Non-fungible tokens (commonly known as NFTs) are outside the scope of the amendments in the ASU. Obtaining market prices for items that are not fungible could prove to be difficult and costly to measure, surrounded by uncertainties that would make the fair values less useful for decision making. Additionally, investors have observed that reporting entities are generally not holding material amounts of NFTs.
• With respect to criterion #6 above, the FASB clarified that an entity that mines or validates and receives newly created crypto assets is not considered the creator of the crypto assets that it receives as consideration for performing services if mining or validating is the only involvement that an entity has in the creation of the asset.

Measurement

The amendments of ASU 2023-08 do not change the initial measurement of crypto assets. However, the amendments require subsequent measurement of in-scope assets at fair value, using the fair value measurement guidance prescribed by ASC Topic 820. Changes in fair value will be recognized in net income / changes in net assets.

Practice Notes

• The FASB decided against providing guidance on the treatment of transaction costs to acquire crypto assets, because whether they are capitalized or expensed, comprehensive income for the period in which the assets are acquired would be the same, due to the requirement to subsequently measure the crypto assets to fair value. Industry-specific guidance that requires capitalization of transaction costs for certain entities is not changed by the amendments in the ASU.

Presentation

The amendments of ASU 2023-08 require the following adjustments in financial statement presentation:

• Balance Sheet / Statement of Financial Position - Crypto assets measured at fair value must be presented separately from other intangible assets. Entities are permitted, but not required, to further disaggregate the crypto assets by individual asset holding or intangible asset class.
• Income Statement / Statement of Activities - Changes from the remeasurement of crypto assets must be presented separately from changes in the carrying amounts of other intangible assets.
• Statement of Cash Flows – Crypto assets received as consideration and converted nearly immediately to cash shall be classified as operating activities. “Nearly immediately” in the context of ASU 2023-08 refers to a short period of time that is expected to be within a few hours or a few days, rather than weeks. No additional incremental guidance is provided regarding the statement of cash flows presentation.

Disclosure

The amendments of ASU 2023-08 require the following disclosures, which are applicable for both annual and interim reporting periods:

• Major holdings of crypto assets and relevant information (name, cost basis, fair value, number of units for each). For crypto assets that are not individually significant, aggregated information can alternatively be disclosed regarding cost bases and fair values.
• For crypto assets subject to contractual sale restrictions, the fair value of the assets, nature and remaining duration of the restrictions, and the circumstances that could cause the restrictions to lapse should be disclosed.

For annual reporting periods only, the following additional disclosures are also required:

• Method for determining cost basis for computing gains and losses (for example, FIFO, specific ID, average cost).
• Line item in which gains/losses are reported in the income statement (if not separately presented).
• Reconciliation in aggregate of activity from the opening to closing balances of crypto assets (additions, dispositions, gains/losses). Gains and losses must be presented separately in the reconciliation on a crypto-asset by crypto-asset basis, so that a user can see whether there are large gains offsetting large losses during the period.
• The following information is also required to be disclosed about the activity reconciliation:
  • A description of the nature of activities that result in additions (for example purchases, receipts from customers, or mining activities) and dispositions such as sales or use as payment for services.
  • Total cumulative realized gains and losses from dispositions that occurred during the period (computed as the difference between the disposal price and the cost basis of the assets).

Practice Notes

• Crypto assets received as consideration in the ordinary course of business and that are nearly immediately converted to cash can be excluded from the activity reconciliation disclosure, since there is no ongoing risk exposure associated with these assets.
• The disclosure requirements of ASU 2023-08 are incremental to any disclosures that would be already required by other topics to which the crypto assets measured at fair value may be subject, such fair value disclosures required by ASC Topic 820.

Next Steps for ASU 2023-08

All types of entities can be affected by the amendments of ASU 2023-08. It is important to have a trusted advisor on your side to help you navigate this new ASU.