Fair value measurement is coming for certain crypto assets

Sean C. Prince
10/13/2022
Fair value measurement is coming for certain crypto assets

A recent FASB decision means certain crypto assets will be measured at fair value.

In under a minute

  • On Oct. 12, 2022, the Financial Accounting Standards Board (FASB) tentatively decided to amend U.S. generally accepted accounting principles (GAAP) to account for an entity’s holdings of certain digital assets – for example, bitcoin and ether – at fair value (rather than at historical cost less impairment).
  • The FASB’s latest decision follows on the heels of its meeting in August 2022 to focus the scope of its efforts on fungible crypto assets and crypto assets that don’t convey a right to a good or service, ruling out the use of fair value for non-fungible tokens (NFTs) and utility tokens.
  • Prior to the issuance of a formal proposal, the FASB will meet again to discuss presentation matters, disclosure requirements, and transition guidance.

Background

Under existing U.S. GAAP, many digital assets (for example, holdings of bitcoin and ether) are accounted for as indefinite-lived intangible assets under Topic 350, “Intangible Assets.” Both user and preparer stakeholders have expressed concern to the FASB that an intangible asset accounting model in which digital assets are measured at historical cost less impairment does not faithfully represent the economics of such holdings. Many of these same stakeholders requested the FASB to consider whether all or some subset of digital assets should be accounted for at fair value.

In response to stakeholder feedback, in May 2022, the FASB added a project to its agenda to consider whether a certain subset of digital assets should be measured at fair value.

Scope of the FASB’s project

At its Aug. 31, 2022, board meeting, the FASB tentatively identified the scope of its project to be limited to crypto assets held by an entity that possess all the following characteristics. Such assets must:

  • Meet the definition of “intangible asset” as defined in the Codification Master Glossary
  • Not provide the asset holder with enforceable rights to, or claims on, underlying goods, services, or other assets
  • Be created or reside on a distributed ledger or blockchain
  • Be secured through cryptography
  • Be fungible

Crowe observation: The project’s scope includes holdings of some of the most actively traded crypto assets, such as bitcoin and ether. On the other hand, it does not include other popular digital assets such as 1) NFTs, 2) utility tokens that provide the holder thereof with rights to goods or services, and 3) stablecoins that meet the definition of a financial instrument. Entities with digital assets outside the scope of the FASB’s project will continue to need to apply judgment to determine the proper accounting treatment for such assets.

Fair value measurement

On Oct. 12, 2022, the FASB tentatively decided that crypto assets within the scope of its project should be measured at fair value with changes in fair value recorded through comprehensive income. The board plans to discuss at a future date whether changes in fair value would be presented in earnings or through other comprehensive income and what disclosures entities would be required to provide. The board confirmed fair value measurement would be required for all entities.

The board was asked whether it wanted to provide application guidance for determining the fair value measurement of crypto assets (for example, how to determine the principal market, how to determine leveling within the fair value hierarchy, and what to do if markets are inactive) but ultimately decided not to.

Crowe observation: While it considered making the fair value measurement of in-scope crypto assets optional, the FASB ultimately concluded crypto assets within the scope of the project should be required to be measured at fair value. Board members commented that fair value measurement better reflects the economics of crypto asset holdings within the scope of the project. Additionally, a fair value option could potentially result in a lack of comparability.

Next steps

Before the FASB issues a proposal of its decisions, it plans to meet to discuss the following items:

  • Presentation guidance. For example, would changes in fair value be presented in earnings or in other comprehensive income?
  • Disclosure requirements. For example, which fair value measurement disclosures in Topic 820, “Fair Value Measurement,” should be required for crypto assets measured at fair value?
  • Transition guidance. For example, should the change in measurement attribute be recognized prospectively or retrospectively?
  • Other sweep issues.

Learn more

Sean Prince
Sean C. Prince
Partner