The Financial Accounting Standards Board (FASB) on Wednesday, September 6 vote, unanimously in support of changing digital assets reporting. The new rules amend the reflection of cryptocurrencies within the business financial reporting.
The new accounting rules change how businesses account for digital assets, including wrapped tokens and nonfungible tokens (NFT). The new financial reporting extends how businesses would disclose cryptocurrency holdings. The new rules target improving transparency regarding the volatile assets for consumption by investors.
The FASB journey traces to its establishment in 1973. It is recognized by the US Securities and Exchange Commission (SEC) as undertaking a designated role to set accounting standards for public companies.
Approved Change of Crypto Rules Yields Support
The FASB chairman, Richard Jones, considers that the approved rules have yielded unmatched excitement and passion from people. He added that FASB heard overwhelmingly from investors identified as capital providers. This understanding informs the motive of the new rules as obligating the inclusion of digital assets information in financial statements for investors to reach informed decisions.
In support, FASB board member Christine Botosan indicated that it involves an occasional incident where costs are factored out from the system to guarantee the usefulness of financial statements. Consequently, she considers the Wednesday vote the easiest since they could realize both.
Accounting Rule Expand Scope to Include Impairment Charges
The rules direct firms to record crypto holdings at the original cost. However, the companies should write the digital assets down as impairment charges whenever the value declines below the cost.
The companies cannot mark up whenever the price increases. Nevertheless, the method draws criticism as a method partially reflecting the value changes.
The new rules compel companies to account for cryptocurrencies at their fair market value, thus accommodating the frequent price fluctuations. This mechanism will ensure the gains and losses flow via the income statement.
The FASB rules scale the disclosure requirements by including major crypto holdings on a cost basis. The rules require disclosure of assets with restricted sales. Also, the rules obligate reconciling digital asset activity while accommodating the opening and closing balances.
FASB Considers New Crypto Accounting Rules Brings Needed Transparency
Jones restated the FASB mission by reflecting the economics behind every transaction in offering investors the information needed. He considers that as capital allocators, investors desire information regarding any crypto activity.
Marsha Hunt, a board member, lauded the FASB vote as one aligned with its mission of writing standards for the future world from today’s events.
FASB clarified that the new requirements are enforceable to all digital assets, including Ethereum, Bitcoin, and fiat-pegged stablecoins. The board delved into some debate concerning the wrapped and nonfungible tokens (NFTs). They acknowledged that the two classes provide claims tied to other assets that need exclusion from the disclosure scope.
Botosan considers that excluding the new disclosure scope would not interfere with their accounting at cost net of the impairment charges. The member notes that such would not be as relevant.
Botosan regretted that excluding wrapped tokens and NFTs from the disclosure would erode the transparency desired for the two tokens. It would leave the digital assets reliant on details captured in the stakeholders’ comment letters. Consequently, it would omit an essential element of the blockchain ecosystem.
FASB member Susan Cosper indicated that failure to expand the scope to include wrapped tokens and NFTs would create disappointment. However, she considers that the intention of FASB to keep the project narrow expedited the conveyance of the information to investors sooner.
FASB indicated that all public and private entities should apply the newly approved rules. However, the effective date arises in the fiscal years that start after mid-December 2024.
Transitioning Costs to FASB Rules Minimal
Compliance with the new FASB rules would not impose huge transition costs and efforts. FASB notes that most of the 80 commenters admitted already in voluntary reporting and tax compliance that feature much of the needed infrastructure by the new rules.
The move to approve the new accounting rules for crypto coincides with increased pressure from stakeholders, including MicroStrategy, Tesla, and Block, citing their sizable Bitcoin holdings. The pressure is inevitable, considering that blockchain-based intelligence firm Arkham revealed Grayscale Bitcoin Trust had Bitcoin balances exceeding $16 billion.
FASB’s motivation for approving the crypto accounting rules is to end the asymmetric treatment of digital assets. MicroStrategy executive chair Michael Saylor welcomed the fair value accounting to Bitcoin. He considered the upgrade to eliminate a major challenge that hindered Bitcoin’s corporate adoption as an alternative treasury asset.
Financial analyst Stack Marco admitted that most public corporations would not purchase Bitcoins without the change in accounting rules. He added that the vote concluded the standard-setting process unveiled in July 2022 when FASB first floated the proposal.
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