New FASB Rules Guarantee Fair Value Accounting for Bitcoin
The FASB has announced that fair value accounting will be the new standard for Bitcoin and other digital assets, starting in December 2024.
The Financial Accounting Standards Board (FASB) has made headlines with its new announcement, declaring that private firms must enter Bitcoin and other digital assets into their accounts according to their fair value.
The FASB announced these new rule changes on December 13, claiming that they will not become legally binding until a year later. Essentially, the new regulations end a previous status quo where bitcoin was considered an intangible asset — similar in legal status to a copyright — for accounting purposes. This had several complications for any entity holding these assets directly. If the valuation went down, this bitcoin would incur an impairment charge. The term “charge” here doesn’t mean that the company would be liable to pay losses, rather the books would merely gain a black mark noting the loss of value. This black mark would be visible in the future for investors or anyone else looking into the firm’s financial standing. However, if the value of bitcoin went up, it wouldn’t erase these black marks or influence the ledgers in any manner until the coins were actually sold for fiat. Considering the volatile nature of a currency that highly encourages long-term holding, these are serious inconveniences.
This new rule has been several months in the making, as the Board voted to adopt policies along these lines in September this year. Previously, there were “no specific accounting or disclosure rules for crypto assets in the U.S,”, creating the same sort of “Wild West” situation that has periodically come up when regulations approach cryptocurrency. The unanimous vote from the Board was generally well-supported by the business community, as the FASB even made an open invite for public comment on the subject. Vice Chair Jim Kroecker claimed that “the rule’s benefits not only likely outweigh the compliance costs for companies, but could also spur cost savings in some cases,” and this attitude might explain why the time table moved up.
Upon the vote in September, the Board claimed that the new regulatory approach wouldn’t come into effect until 2025, but the announcement made in December moved this deadline up to 2024. “The new standard responds to feedback from stakeholders of all backgrounds who indicated that improving the accounting for and disclosure of crypto assets should be a top priority for the Board,” claimed Chairman Richard R. Jones. He added that these new rules “will provide investors and other capital allocators with more relevant information that better reflects the underlying economics of certain crypto assets and an entity’s financial position while reducing cost and complexity associated with applying current accounting.”
Nevertheless, there will certainly be challenges to the implementation of these rules, and the community is certainly not unanimously in favor. For one thing, the wild fluctuations of Bitcoin’s price mean that the procedures to update company ledgers need to be fast, accurate and very complex. It may be difficult getting auditors able to keep track of any number of digital assets, especially considering that the terms of eligibility may change from token to token. The FASB’s announcement claims that assets which “provide the asset holder with enforceable rights to or claims on underlying goods, services or other assets” are not part of these rules, thereby leaving things like NFTs and wrapped tokens out of the equation. Stablecoins, non-fungible and issuer-created assets are also exempt. Considering that some firms like exchanges hold small quantities of dozens of such assets, finding people to settle the books may prove thorny.
Several firms in particular seemed opposed to these changes when they were first voted on in September. Ajmere Dale, Chief Accounting Officer at Block cited confidentiality concerns in a letter, claiming that his company “strongly believes additional disclosure about cryptography private keys would not be useful to readers, and that discussion of risk factors that are already in our financial statements are sufficient.” A letter from Andrew Kang, CFO at MicroStrategy, added that “disclosing the nature and purpose of holding crypto could become less relevant in the future if the assets continue to gain wider adoption.” Kang did nevertheless include that his “company is encouraged by the widespread support for the proposed change during the comment period.”
It is interesting that these companies in particular came out in opposition to these changes several months ago, as they have been identified alongside Tesla as some of the most high-profile firms that stand to benefit financially. These firms have all bought huge amounts of bitcoin, and in particular a large amount of these coins were purchased at far lower prices than the going rate today. If these were entered into the books at fair value, it would cause an immediate bump of considerable proportions. MicroStrategy’s stock valuation has gone up by 5% since the FASB made its announcement, but Block and Tesla have not experienced a similar effect. Seeing as bitcoin has been doing so well this year, who wouldn’t want assets like this counted in their favor?
A fair value for bitcoin in corporate accounting seems like the right move, with benefits far outweighing potential costs. The system to assess this fair value and keep it up to date on businesses nationwide will have to be sophisticated, and may very well come with unanticipated drawbacks. Nevertheless, there is a year until implementation for these rules to go into effect, and they come with significant benefits in turn. Fair value will enable companies that have already bet on bitcoin to see some more direct vindication for their beliefs, and another significant barrier will drop for companies looking to invest today. Fair value accounting represents another way that Bitcoin is becoming truly enmeshed within the existing financial structure, and the opportunities are plentiful.
NOT FINANCIAL ADVICE
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