Cryptocurrencies, born in the aftermath of the 2007-2009 financial crisis, were rooted in a desire to address the shortcomings of centralized banking with a decentralized digital currency. Their substantial growth, accelerated during the Covid-19 pandemic, presents an enduring allure for corporations and institutions.
However, these entities face a practical challenge in managing crypto holdings on their books. As corporate interest grows, the need for accounting rules becomes more apparent, intensifying the call for regulatory initiatives. On Dec. 13, these rules became a reality with the issuance of ASU 2023-08.
Challenges
Compared to traditional assets, cryptocurrencies are challenging to categorize due to their decentralized nature and volatility. For instance, while bitcoin functions as a global currency like the US dollar, it lacks governmental backing for classification as cash.
Major cryptocurrencies are readily convertible to cash like Treasury bills, but their lack of maturity and notable price fluctuations preclude their classification as cash equivalents. Most cryptocurrencies deviate from stocks and bonds for their lack of ownership interests and contractual rights.
Compounding these challenges is the perception that only a small fraction of public companies actually held onto cryptocurrencies, tempting a delay in rule-setting actions. It wasn’t until 2021 that the Financial Accounting Standards Board officially launched rule-setting efforts with release of an agenda consultation inviting public comments.
This initiative culminated in issuance of ASU 2023-08, the first rule providing accounting and disclosure guidance for certain crypto assets.
Previous Guidance
Before then, the non-authoritative guidance—released by the Big Four accounting firms and American Institute of Certified Public Accountants between 2018 and 2019—suggested crypto holdings were best classified as indefinite-lived intangible assets.
To gain a comprehensive understanding of the prevailing state of crypto accounting, my colleagues and I conducted an extensive study on the accounting and disclosure practices of US public firms with crypto holdings, focusing on reporting periods ending between fourth-quarter 2013 and fourth-quarter 2022. I highlight two key findings of our study.
First, despite the modest overall count of US public companies disclosing crypto holdings (82 entities in fourth-quarter 2022), the trajectory suggests exponential growth.
The value of crypto holdings held by these entities surged from $16.4 million at the end of 2013 to $105 billion by the end of 2022, based on our best estimates from the companies’ disclosed figures.
This surge outpaces the growth in crypto prices, signifying a substantial increase in the significance of crypto holdings. Importantly, this surge supports the call for authoritative accounting rules and provides robust justifications for rule-setting efforts.
Second, firms exhibit considerable discretion in their approach to accounting for crypto holdings. Some adopt the fair value model following ASC 820, while others opt for the impairment model following ASC 350, often without disclosing the fair value.
The latter group also employs diverse impairment triggers, ranging from undisclosed bases to the quarter period-end price or the lowest price since acquisition. These disparate accounting and disclosure practices introduce inconsistencies and potential misinformation for investors and other stakeholders.
Changes and Hurdles
The post-ASU 2023-08 era promises a more uniform and transparent approach to accounting for crypto holdings. Under the new rule, covered crypto assets will be measured at fair value according to ASC 820, and any changes in fair value will be recognized through net income.
This shift is expected to reduce inconsistencies in the measurement of crypto assets. Anticipated changes also include a separate-line presentation of crypto assets on balance sheets and granular disclosure of the cost and quantities of the crypto assets held.
With the introduction of a standardized framework, companies are poised to better navigate the complexities of crypto reporting and investors are provided better information to understand the value implications of corporate crypto holdings.
While the issuance of ASU 2023-08 marks an important first step, some challenges remain. Foremost, ASC 820 mandates the use of quoted prices in active markets for identical assets and liabilities while allowing for alternative pricing models when quoted prices either aren’t readily determinable or don’t faithfully represent the fair value.
These nuances are heightened for crypto assets because many cryptocurrencies display pricing disparities across different exchanges or trading platforms. The varying levels of liquidity and price transparency in cryptocurrencies may also present unforeseen challenges in determining their fair values.
Secondly, ASU 2023-08 excludes certain crypto assets, such as self-issued tokens, nonfungible tokens, and wrapped tokens; some of these uncovered tokens are notoriously difficult to measure, making accounting guidance particularly valuable.
For instance, entities’ self-issued tokens fundamentally differ from open-source cryptocurrencies such as bitcoin and ethereum, resembling equity more than assets. The absence of clear accounting guidance for such tokens has proven problematic, evidenced in the case of FTX Trading Ltd. While NFTs stand out as non-interchangeable, unique digital assets, the ease of determining their fair values also varies with the platforms and trading volume.
Last, companies may face implementation challenges, including the need for specialized expertise and trained personnel to comprehend crypto assets and establish reliable data sources, as they comply with the new rules. These hurdles shouldn’t be underestimated.
Outlook
The establishment of crypto accounting rules is an essential undertaking. The difficulties in crafting such rules are undeniable, but the potential benefits in achieving transparency, consistency, and investor confidence are too significant to overlook.
As we navigate this uncharted terrain, the collaboration between regulators, practitioners, and educators will be crucial in embracing the evolving changes in the crypto world while safeguarding the integrity of financial reporting.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Vivian Fang is finance professor and chair at the Kelley School of Business, Indiana University. She has been teaching and researching cryptocurrencies since 2018.
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