Author: LianGuaiBitpushNews Mary Liu
The Financial Accounting Standards Board (FASB) in the United States has unanimously voted to change the accounting and disclosure methods for companies’ holdings of cryptocurrencies such as Bitcoin and other digital assets. The new rules will take effect in 2025 and aim to provide greater transparency to investors and other users of financial statements regarding these volatile assets.
FASB was established in 1973 and is the standard-setter for accounting principles for publicly traded companies in the United States.
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Currently, US companies do not have specific accounting or disclosure rules for cryptocurrency assets. Cryptocurrency assets are classified as indefinite-lived intangible assets, similar to copyrights and other intellectual property. Companies must review the value of such assets at least once a year, and if the value is lower than the purchase price, they must impair the assets. If the value increases, companies can only recognize gains when they sell the assets, and they cannot recognize gains if they continue to hold the assets.
Under the new rules, companies must separately account for their cryptocurrency assets, so that investors and other readers of financial statements can clearly understand the investment value of the company in cryptocurrencies.
In addition, they will disclose a significant amount of holdings of cryptocurrencies and any restrictions on these holdings in footnotes for each reporting period. They must reconcile or disclose changes in the beginning and ending balances of cryptocurrency assets by category every year. FASB agrees that they do not need to include information about cryptocurrency assets received as payment and immediately converted to cash in the reconciliation activities.
FASB agrees that since cryptocurrencies will be measured at fair value, companies will comply with the disclosure requirements required by applicable accounting standard ASC 820, so that financial statement readers know how the company arrived at its measurement results.
The new FASB rules will require companies to account for digital assets at fair market value, capturing frequent price fluctuations, and the gains and losses will be recorded in the income statement.
These rules also expand disclosure requirements, including detailed information such as the cost basis of major cryptocurrency holdings, restrictions on the sale of assets, and adjustments to cryptocurrency asset activities from the beginning to the ending balance for the period.
The new requirements apply to cryptocurrencies such as Bitcoin and Ethereum, as well as stablecoins pegged to fiat currencies, but do not include non-fungible tokens (NFTs) and wrapped tokens.
All publicly traded and private companies are required to comply with the new rules, which take effect for fiscal years beginning after December 15, 2024, and early adoption is allowed.
FASB Chairman Richard Jones said, “I don’t think in my short tenure that we’ve had anything that has generated this level of passion. We’ve heard from the vast majority of investors who allocate capital based on financial statements that this will give them better information to make decisions, so I’m fully supportive.”
FASB board member Christine Botosan agreed, “It’s not often that we can reduce system costs and enhance the effectiveness of information decision-making at the same time, so when we can do both, it makes voting very easy.”
How Does It Impact Public Companies?
According to current rules, companies must record the amount of cryptocurrency holdings at the original cost. If the value falls below the cost, it is recorded as “impairment expense”, but if the price rises, it cannot be recorded unless it is sold immediately. This approach has been criticized by the crypto community for only reflecting one aspect of value change.
Automaker Tesla, payment company Block, and software provider MicroStrategy are among the few public companies that hold cryptocurrency on their balance sheets.
Michael Saylor, co-founder and CEO of MicroStrategy, said, “Fair value accounting is about to enter Bitcoin. This upgrade of FASB accounting rules eliminates the main barrier for companies to adopt BTC as inventory assets.”
Swan Bitcoin tweeted, “This will undoubtedly benefit Bitcoin.”
Financial analyst Stack Macro pointed out, “Without changing this rule, most public companies cannot store Bitcoin. Now, companies with sufficient cash have a way to protect their investment portfolios from depreciation.”
Industry observers say that cryptocurrency-specific accounting standards can mitigate concerns of companies about impairment expenses caused by market fluctuations.
Analyst Mark LianGuailmer of Berenberg tweeted that the updated rules should help MicroStrategy and other companies holding digital assets eliminate the negative perception of impairment losses under the existing FASB guidelines.
LianGuailmer pointed out that since buying Bitcoin in August 2020, MicroStrategy has reported $2.2 billion in impairment losses, which sends the wrong message to investors.
Jeff Rundlet, Director of Strategy at accounting software company Cryptio, believes, “This is a big step forward for the entire cryptocurrency market. I think this is a big step towards mainstream adoption. Ultimately, this proposal is to help larger companies who may be afraid of holding cryptocurrency on their balance sheets because they fear the complexity of the technology.”