On December 13, 2023, the FASB issued Accounting Standards Update (ASU) 2023 No. 2023-08, Intangibles–Goodwill and Other–Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets.
This ASU was a much-needed change, which had been requested by stakeholders, and ultimately the changes provide accounting rules that are simplified and more reasonable for crypto assets. As noted in within the ASU, the previous accounting treatment did not reflect “(1) the underlying economics of those assets and (2) an entity’s financial position.”
What was the accounting treatment for crypto assets prior to adoption of the new ASU?
Prior to adoption of the ASU 2023-08, the accounting treatment for crypto assets, unless a part of a specialized industry, was as follows:
- At time of purchase, the crypto assets were to be recorded at cost.
- Thereafter, the assets would be required to be tested for impairment annually and more frequently, if events or circumstances indicate that it is more likely than not that the assets are impaired.
Effectively, the accounting treatment was to record the crypto assets at the purchase price and then only potential reduce the value based upon impairment tests on an annual or more frequent basis. The accounting rules were unnecessarily complex for assets that are priced based on active market data.
Challenges faced by those holding crypto assets were - How would an entity reasonably determine what events or circumstances would require an impairment test for crypto assets? This requirement provided unnecessary complexity and challenges regarding an asset that trades daily in an active market.
What does the ASU change?
The changes made in the ASU apply to assets that meet all of the following criteria:
- Meet the definition of intangible assets as defined in the Codification.
- Do not provide the asset holder with enforceable rights to or claims on underlying goods, services, or other assets.
- Are created or reside on a distributed ledger based on blockchain or similar technology.
- Are secured through cryptography.
- Are fungible.
- Are not created or issued by the reporting entity or its related parties.
Entities will be required to subsequently measure assets that meet those criteria at fair value with changes recognized in net income each reporting period.
Additionally, crypto assets measured at fair value should be presented separately from other intangible assets in the balance sheet. Further, the changes in the carrying amounts of crypto assets should be presented separately from other intangible assets in the income statement.
For annual and interim reporting periods, entities with crypto assets are required to disclose data regarding each significant crypto asset holding (name, cost basis, fair value, number of units) and crypto asset holdings that are not individually significant (the aggregate fair values and cost basis).
For annual reporting periods, entities with crypto assets will also be subject to additional requirements, as follows:
- An activity roll forward for each period
- The difference between the disposal price and the cost basis (or gains and losses) on dispositions of the assets including a description of the activities that resulted in the disposition.
- If gains and losses are not reported separately on the income statement, the income statement line item in which these gains and losses are recognized.
- The method for determining the cost basis of crypto assets.
When do the changes become effective?
The amendments with the ASU are effective for all entities for fiscal years beginning after December 15, 2024, including all interim periods within those fiscal years.
Early adoption is permitted for both interim and annual financial statements that had not yet been issued prior to the release of this ASU.
Effectively, the FASB corrected the accounting treatment for crypto assets to align more correctly with the economic substance of these assets and should provide all stakeholders with financial information that is more useful and understandable than under the previous rules.
As an aside, for any entities or individuals that purchased crypto assets and may have used the assets to make purchases or had other transactions associated, the tax reporting can be rather complex for simple transactions. Additionally, there are ASC 606 considerations for businesses that acquired balance sheet digital assets as consideration for providing a good or service, and ASC 815 may also apply for crypto assets received in the future, as this right may include an embedded derivative.
Digital Assets which are out-of-scope of the new ASU, such as NFT’s, tokens issued by the balance sheet company, Wrapped Tokens (e.g., wBTC, wETH), and Stablecoins, will continue to be accounted for using the Cost Less Impairment framework under ASC 350. This will also create some nuances for companies holding both in-scope and out-of-scope assets on their balance sheet within the context of the new ASU.
Under the new ASU, which applies to both public and private entities, Fair Market Value increases on in-scope balance sheet digital assets will flow through to earnings and positively impact the company’s value.
If you have digital assets on your balance sheet, need assistance assessing in-scope vs. out-of-scope, need guidance transitioning to ASU 2023-08 / ASC 820, including Balance Sheet, Income Statement and Statement of Cash Flows Presentation as well as Disclosures, or have questions about ASU 2024-08/ASU 820/ASU 350, feel free to reach out to our Digital Asset & Financial Institutions teams to discuss your specific situation.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.