In what is being received as a very meaningful development for the cryptocurrency industry, the Financial Accounting Standards Board (“FASB”) signaled this week that public and private entities that hold certain crypto assets will be required to measure those assets at fair value. FASB’s decision will have been the product of substantial research and deliberation, and, based on the feedback it has received from companies, investors, professional bodies, and preparers, a welcomed change.

Current Accounting Guidance for Crypto Assets

To date, a lack of concrete guidance has manifested in most companies accounting for crypto assets according to ASC 350-30, Intangibles – Goodwill and Other. In practice, companies have initially measured crypto assets at cost and subsequently evaluated those assets for impairment based on the lowest observable fair value within the reporting period.¹ In periods where the values of crypto assets have declined, this has resulted in companies recording impairment losses.

This practice has elicited criticism from various market participants, including both retail investors and the companies themselves. Among those criticisms, perhaps the most often levied is one that points to companies’ inability to reverse that impairment or otherwise increase the reported values of the crypto assets held in times when the observable market values of those assets appreciate. In instances where a company’s crypto assets have appreciated in value over time, this can lead to a disconnect between the value presented on the company’s balance sheet and the company’s actual financial position, necessitating substantial non-GAAP (Generally Accepted Accounting Principles) disclosures.

Instead, detractors have argued, companies should be able to employ fair value accounting when measuring crypto assets on their financial statements, which would otherwise allow the recognition of both gains and losses in current period earnings when simply holding crypto assets. On Wednesday, October 12, 2022, FASB members met to discuss a variety of issues, one of which specifically addressed these detractors – the question of how entities holding crypto assets should measure those assets for financial reporting purposes.²

History of FASB’s Approach to Crypto Asset Measurement

The October 12 meeting only represents the most recent activity on FASB’s part to address issues around how companies account for digital assets in their financial statements. This has been an ongoing process for FASB, catalyzed by its decision in June 2021 to issue an Invitation to Comment, via which it invited public feedback regarding its standard-setting agenda going forward. Within that document, FASB noted that its Board had “received several agenda requests on accounting for crypto assets,” and that, in October 2020, it had considered those requests but elected not to add a targeted project to its agenda, citing a “lack of pervasiveness.”³ However, it further noted that it had continued to monitor the subject, and in June 2021 FASB issued questions on digital assets targeted to investors, preparers, practitioners, and other stakeholders.⁴ We note that, in the same document, FASB requested comment on numerous unrelated topics, such as reductions in the complexity in GAAP accounting, presentation of the Statement of Cash Flows, and ESG-related transactions, among others.

The June 2021 Invitation to Comment set a September 22, 2021, deadline and ultimately yielded 522 responses. FASB noted that 445, or 85%, of those responses “solely focused on the Board prioritizing accounting for digital assets at fair value.”⁵

Of note was a response from the Chair of the Financial Reporting Executive Committee (“FinREC”), a senior committee of the American Institute of Certified Public Accountants (“AICPA”). In its response, FinREC noted that transactions involving digital assets “are now/anticipated to be material to the overall financial reporting system” and its belief that “the application of current GAAP too often fails to convey the economic substance of crypto asset transactions, and too often results in counter-intuitive accounting conclusions.”⁶ FinREC provided various views on how FASB might move forward but stated, “FASB should explore with stakeholders if fair value should be required or optional when a liquid market exists.”⁷ It then offered two options for the measurement of crypto assets:

1. Classifying crypto assets as a separate category of assets, whereby if their market is deemed to be liquid, they be measured using fair value as defined by ASC 820.⁸ If the respective market is deemed illiquid, the crypto assets would be accounted for at cost and tested for impairment at the end of each reporting period.
2. Classifying crypto assets as a specific type of intangible asset, whereby if their market is deemed to be liquid, they be measured using fair value as defined by ASC 820 (if “fair value required”) or ASC 825 (if “fair value optional”). However, if their market is deemed illiquid, the crypto assets should be classified as indefinite-life intangible assets, and ASC 350 would continue to apply, but ASC 350 “should be amended to allow crypto assets accounted for at cost to be written back up to cost to reflect subsequent impairment recoveries, thus being an exception to the broad requirements on impairment of intangible assets.”⁹

On May 11, 2022, the Board agreed, in a vote of 7-0, to add a project to its technical agenda “to improve the accounting for and disclosure of certain digital assets.”¹⁰ On August 31, 2022, approximately three months later, FASB clarified the scope of the project, specifically identifying the following criteria that must be met to be considered “crypto assets” for its purposes:¹¹

• Meet the definition of intangible asset as defined in the Codification Master Glossary
• 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 or “blockchain”
• Are secured through cryptography
• Are fungible

We note that, by virtue of criterion (e), Non-Fungible Tokens (“NFTs”) are outside the scope of this project. Rather, only fungible assets, such as Bitcoin and Ether, which public and private companies are increasingly holding on their balance sheets, are relevant to this particular FASB project.

Recent Developments in Crypto Asset Measurement

FASB’s next notable advancement of the project came October 12, at which time the Board held a meeting to discuss six issues related to crypto asset measurement, the first of which was the primary measurement basis. The Board determined that if fair value was selected as the primary measurement basis, five additional “follow-on” issues would be discussed, including:¹²

1. Whether companies will have optionality in selecting a measurement basis
2. How to measure crypto assets that lack an active market
3. Whether and how costs to acquire crypto assets should be expensed and/or capitalized
4. Whether additional implementation guidance should be provided
5. Whether there should be a difference for private companies in the measurement of crypto assets, based on the Private Company Decision Making Framework

Notably, the seven members of the FASB Board unanimously agreed, alongside the Staff, that fair value is the appropriate primary measurement basis for crypto assets. In discussing this topic, certain Board members made the following statements in support of the fair value measurement basis:¹³

• Citing Bitcoin’s volatility, “the only way to get any kind of real information on the holding of bitcoin or Ethereum is through fair value.”
• Fair value “reduces costs for users” and “reduces costs for companies.”
• “Topic 820 has a lot of good disclosures that would enhance the transparency around how [companies are] valuing [crypto assets].”
• Fair value “does better capture the economics of this type of asset, and providing that information better achieves the objective of financial reporting.”
• Fair value “has the benefit of reducing industry-specific differences.”
• Fair value “aligns the accounting for crypto assets that are deemed to be intangibles with how crypto assets are valued elsewhere in the codification.”

Similarly, the FASB Board and staff unanimously agreed that companies should not be given the option to choose an alternative measurement basis, primarily citing issues such as lack of comparability among entities’ financial statements, which would necessitate additional information from each entity to determine its policies related to optionality.

Regarding the remaining issues, the FASB Board and Staff unanimously agreed not to pursue alternative measurements for crypto assets that lack active markets, as the Staff opined such a need “is not believed to be pervasive” at this time.¹⁴ It was also agreed that no additional considerations were necessary to specifically address private companies holding crypto assets. The most contested issue was with regard to how companies should treat costs associated with acquiring crypto assets, with the Board narrowly concluding that these costs should be expensed, with a carveout for the bid-ask spread. The meeting concluded with the Staff describing next steps, which would include addressing presentation, disclosure, and transition issues, as well as potentially matters concerning issuers holding crypto assets.

Following the meeting, FASB released its “Tentative Board Decisions,” in which it stated, “The Board decided to require an entity to:

1. Measure crypto assets at fair value, using the guidance in Topic 820, Fair Value Measurement.
2. Recognize increases and decreases in fair value in comprehensive income each reporting period.
3. Recognize certain costs incurred to acquire crypto assets, such as commissions, as an expense (unless the entity follows specialized industry measurement guidance that requires otherwise).”¹⁵

The October 12 meeting is part of Phase 2 of FASB’s technical agenda for this project, termed the “Initial Deliberations” phase. Four additional phases are anticipated, though the timing of each is unclear:¹⁶

1. Added to Agenda
2. Initial Deliberations
3. Exposure Draft
4. Exposure Draft Comment Period
5. Exposure Draft Redeliberations
6. Final Standard

Looking Forward

Many expect FASB to formalize fair value measurement for crypto assets by the end of the calendar year. While the impact of this change would be felt immediately by the stakeholders of companies that already have exposure to crypto assets, industry analysts are eager to see whether FASB’s decision will enable more companies to confidently pursue a crypto asset strategy.¹⁷

1. Board Meeting Handout, FASB, October 12, 2022.
2. “FASB Board Meeting – Wednesday October 12, 2022- Topic 2,” FASB, video, October 12, 2022.
3. Invitation to Comment, Agenda Consultation, FASB, June 24, 2021.
4. Ibid.
5. “Feedback Summary on the 2021 Invitation to Comment, Agenda Consultation,” FASB.
6. “Re: Invitation to Comment Agenda Consultation,” American Institute of Certified Public Accountants (AICPA), letter, Angela J. Newell, September 17, 2021.
7. Ibid.
8. We note that within this option, FinREC offered sub-options, which were “fair value required” and “fair value optional.”
9. “Re: Invitation to Comment Agenda Consultation,” AICPA, September 17, 2021.
10. Memorandum from Digital Asset Team to Board Members, FASB, May 13, 2022.
11. Memorandum from Crypto Assets Team to Board Members, FASB, September 1, 2022.
12. Board Meeting Handout, FASB, October 12, 2022.
13. “FASB Board Meeting – Wednesday October 12, 2022- Topic 2,” FASB, video, October 12, 2022.
14. Ibid.
15. Tentative Board Decisions, FASB.
16. Technical Agenda, FASB, September 2, 2022.
17. Fotis Konstantinidis and Ashley Ross, “The Wild West: Valuing Cryptocurrency During a Time of Volatility,” Bloomberg Tax, March 30, 2022.