The Financial Accounting Standards Board, in its Feb. 1 meeting, voted to advance its first standard on cryptocurrencies and digital assets. The exposure draft is set to be released in late March and stakeholders will have 75 days to comment.
The board’s project has undergone several refinements over the course of several meetings within the past year. During its Aug. 31 meeting, FASB decided to focus specifically on cryptocurrencies, since the term “digital assets” has an overly broad scope that members felt would only muddy the issue.
During that meeting, the board decided that the proposed standard would apply to those assets which:
- Meet the GAAP definition of an intangible asset (which excludes financial assets);
- Not provide the asset holder with enforceable rights to, or claims on, underlying goods, services or other assets (such as with a contract);
- Have been created, or resides on, a distributed ledger or “blockchain;”
- Are secured through cryptography; and,
- Are fungible.
Later, at its October meeting, FASB decided that cryptocurrencies should be accounted for at fair value using the guidance in Topic 820, “Fair Value Measurement,” in contrast with the more typical method today of cost minus impairment.
FASB believes such an approach would better align measurement of crypto assets with that of other assets used for investment purposes like financial instruments, which are also reported at fair value. The board believes such an approach would also allow alignment between entities that currently use specialized industry or regulatory guidance that require fair value measurement.
During that meeting, the board also said fair value reporting should be required, as it made little sense to make it optional, considering that FASB’s goal is to encourage uniformity in reporting. Similarly, the board uniformly agreed there should be no exceptions for an inactive market where a particular token is not actively traded, such as being able to continue to use the cost less impairment model or being able to say the fair value is 0.
Final adjustments before release
Finally, at its most recent February meeting, FASB considered additional scope questions, the role of “wrapped” tokens that effectively give someone a right to a certain amount of cryptocurrency (usually used for cross-blockchain transactions), the extent to which they should or should not specify the use of public blockchains, effective dates and transition methods, and whether private companies should get more time.
On the additional scope considerations, the board decided that the exposure draft would specifically not cover issuers and creators of cryptocurrencies and their related parties. Board member Susan Cosper said, echoing others who had also spoken, that the project never had these entities in mind anyway and so it was good to be explicit that they are excluded.
“On the creators and issuers issue, I agree — as we went into this, I don’t think my intent was ever to include them, so being explicit in excluding them in terms of the scope is important,” she said.
Staff clarified, though, that cryptocurrency miners would not count as creators or issuers and so would be in the scope of the proposed standard.
Much of the debate was consumed with “wrapped tokens.” The board, after much discussion, agreed that they too should be scoped out of the proposed standard, at least for now. Board member Jim Kroeker felt it would be best to exclude them because there are just too many permutations to consider if they want to ever get this project completed, and further the market for wrapped tokens isn’t big enough yet to be of a major concern anyway.
“Am I trading something asset-backed? The Bitcoin itself is not asset-backed, but a wrapped something means now I have the rights in a contract entitling me to someone else’s asset, so that sounds like an asset-backed investment. Is it an asset-backed security? An indexed receivable? I don’t know how we answer that without knowing the terms of every single contract. Is every wrapped thing an identical contract? Is it taking my own thing and holding it in custody and calling it wrapped? Do they have to own the underlying asset?” he said, then added, “The market phenomena of wrapped crypto … the largest is $4 billion, the total market cap is less than $10 billion. … There would be way more I’d need to expand this scope.”
For similar reasons, board members said they should not specify whether something should be on a public blockchain because the term can be extremely broad and there would inevitably be issues with how they define it.
“I think adding the term ‘public’ would be very problematic. We don’t even know what a public blockchain truly is in the world today, so why bother trying to define it?” said board member Gary Buesser.
The board finally decided that early adoption should be permitted and that a cumulative-effect adjustment to retained earnings (or other appropriate components of equity or net assets in the statement of financial position) would be recognized as of the beginning of the first annual period in which the guidance is adopted. FASB decided that all entities, including nonpublic entities, should be subject to the same effective date and transition requirements.