Companies like enterprise software maker MicroStrategy, electric auto manufacturer
Crypto companies and any other companies that hold Bitcoin or Ethereum will be required to record their coins at fair value, a measurement technique that aims to capture their most up-to-date value, the Financial Accounting Standards Board said in its first crypto accounting rules. Changes in fair value will get recorded in net income.
Outgoing practice only lets companies record the lows, and businesses that bet on Bitcoin have long bemoaned this one-sided accounting treatment. Crypto values can swing wildly, meaning companies often end up reducing the value of their holdings, which shrinks earnings.
The new rules take effect for both public and private companies with fiscal years that begin after Dec. 15, 2024, which means 2025 for calendar year-end companies. Companies can choose to follow the rules ahead of the deadline.
“It’s just a phenomenal time of year to get this holiday gift of commonsense accounting,” said Edward McGee, CFO of Grayscale Investments LLC, the crypto asset manager that has been battling US regulators to build a spot Bitcoin exchange-traded fund.
No specific US accounting rule has so far addressed how companies need to recognize and measure the digital currencies they own. The crypto industry asked FASB to write rules three times since 2017, but the accounting rulemaker has resisted until now.
In the absence of rules, businesses that don’t qualify as investment companies have defaulted to an American Institute of Certified Public Accountants practice guide that treats cryptocurrencies as intangible assets, a category that includes things like trademarks, copyrights, and brands—assets that, unlike crypto, rarely get traded.
The treatment means companies record their coins at the price they paid and mark them down permanently if their value decreases. They only get to record gains if they sell crypto holdings at a profit.
The accounting routinely drags down the earnings of MicroStrategy, the largest public company holder of crypto.
Confusion about when exactly to impair, or mark down, crypto holdings also created accounting headaches at a trio of Bitcoin miners earlier this year, with Marathon Digital Holdings Inc., Bit Digital Inc., and Riot Platforms Inc., forced to restate, or redo, their past financial statements to correct their accounting.
Narrow Scope
FASB kept the new accounting rules narrow on purpose. Non-fungible tokens are excluded, as are stablecoins and issuer-created tokens like those that failed crypto exchange FTX used to beef up its balance sheet. Wrapped tokens—digital tokens that allow crypto from one blockchain to be used on another—also aren’t covered by the new rules. FASB members have said they’d be open to tackling more crypto issues in the future if they become prevalent in practice.
Still, the crypto industry is excited about the new rules, said Salman Khan, CFO of Marathon Digital, which holds the second largest stash of crypto on its balance sheet, according to Bitcoin Treasuries. Formal accounting could pave the way for more adoption of crypto, he said.
“They want to have the standardization and want to have rules around it,” Khan said. “It brings in investor confidence. It avoids the investor fear, ‘Hey am I investing in the right spot or not? The standardization of the rules gives that legitimacy.”
Specifics
Under the new rules, companies will have to make a separate entry for their crypto assets as a line item in their balance sheets.
They also must disclose in their footnotes for every reporting period significant holdings of crypto and any restrictions on those holdings. On an annual basis, they will have to reconcile—or disclose changes in the opening and closing balances of—their crypto assets, broken down by category.
Since company crypto holdings will be measured at fair value, companies will have to disclose how they came up with the measurements using fair value accounting rules under ASC 820.
Fair value can be tricky to get right for certain types of cryptocurrencies, said PJ Theisen, partner at Deloitte & Touche LLP.
“It sounds straightforward,” Theisen said. “One thing to keep in mind is that it can be challenging, particularly for crypto assets, to actually determine what that fair value is.”
Long Time Coming
FASB had resisted writing rules for crypto for years, reasoning that while some companies have accepted cryptocurrency as payment for for products, few actually hold on to the coins. The landscape changed once MicroStrategy Inc. and Tesla Inc. started buying Bitcoin, although Tesla has since unloaded most of its crypto.
The new rules arrive as US regulators, already skeptical about the industry prior to the collapse of FTX, are further cracking down.
“I think crypto is a collection of pet rocks,” said Rep. Brad Sherman (D-Calif.), at a House subcommittee hearing on Tuesday in which FASB Chair Richard Jones testified about the board’s current work. “It does not belong on the balance sheet.”
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