This past week the U.S. Financial Accounting Standards Board (FASB), which establishes financial accounting and reporting standards for U.S. based companies, published an Accounting Standards Update (“ASU”) that will allow corporations to report their crypto asset holdings at “fair value.” Definitions provided below. The amendments in the ASU are effective for fiscal years beginning after December 15, 2024.  

The current U.S. accounting treatment for crypto assets has been a major challenge for the industry as a whole.  Under the existing rules, companies holding crypto assets must account for them as indefinite-lived intangible assets, recording them on the balance sheet at their original cost and then writing them down as an “impairment charge” if the value falls below cost.  However, if the value of the crypto assets rises, companies can only recognize a gain when they sell those assets, rather than during the holding period. 

Under the new standard, instead of having to account for crypto assets on balance sheet at the lower amount of either the purchase price or market value, a company will be able to report the fair value of the crypto assets in the statement of financial position each reporting period with changes recognized in net income. 

According to Michael Saylor, the founder and Executive Chairman of MicroStrategy, the largest public company holder of bitcoin, “this upgrade to accounting standards will facilitate the adoption of $BTC as a treasury reserve asset by corporations worldwide.”  MicroStrategy, which currently holds 174,530 bitcoins in its treasury worth over $7.4 Billion, held its third annual “Bitcoin for Corporations” sessions earlier this year providing companies with a playbook of key considerations in adopting bitcoin as a treasury reserve asset.

In summarizing its considerations for the update, FASB referenced feedback it had received from stakeholders of all backgrounds, including nearly 500 respondents to the 2021 FASB Invitation to Comment (ITC), Agenda Consultation.  Stakeholders indicated that improving the accounting for and disclosure of crypto assets should be a top priority for FASB. They indicated that the current accounting for crypto assets did not provide “decision-useful information” for investors or other parties.  Specifically, accounting for only the decreases, but not the increases, in the value of crypto assets in the financial statements until they are sold does not provide relevant information that reflects the underlying economics of those assets and an entity’s financial position. 

Criteria & Definitions:

The amendments in the ASU apply to assets that meet all of the following criteria: 

1. Meet the definition of intangible assets as defined in the Codification
2. Do not provide the asset holder with enforceable rights to or claims on underlying goods, services, or other assets
3. Are created or reside on a distributed ledger based on blockchain or similar technology
4. Are secured through cryptography
5. Are fungible
6. Are not created or issued by the reporting entity or its related parties.

Fair value is defined in the ASU as “[t]he price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” 

Orderly Transaction is defined as “A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (for example, a forced liquidation or distress sale).” 

Market Participants are defined as “Buyers and sellers in the principal (or most advantageous) market for the asset or liability that have all of the following characteristics:

1. They are independent of each other, that is, they are not related parties, although the price in a related-party transaction may be used as an input to a fair value measurement if the reporting entity has evidence that the transaction was entered into at market terms
2. They are knowledgeable, having a reasonable understanding about the asset or liability and the transaction using all available information, including information that might be obtained through due diligence efforts that are usual and customary
3. They are able to enter into a transaction for the asset or liability
4. They are willing to enter into a transaction for the asset or liability, that is, they are motivated but not forced or otherwise compelled to do so.”