Accounting for crypto assets has felt like the Wild West long enough. With ASU 2023-08, the Financial Accounting Standards Board (FASB) brings clarity into the fold, injecting some much-needed guidance for assets that have a way of giving even veteran accountants a headache. So, let's take a closer look at the new update and what it means for your crypto accounting going forward.

Background on Current GAAP for Crypto Assets

As we've discussed in the past, crypto assets have traditionally fallen under ASC 350 and the umbrella of indefinite-lived intangible assets. Essentially, you measure them at historical cost, with ongoing impairment assessments being the primary method for any subsequent adjustments until the asset is sold.   

Limitations of the Current Cost-less-impairment Model

Numerous stakeholders indicated the current cost-less-impairment model does not exactly offer the most accurate picture for companies holding crypto assets, falling short in some key areas:

1. Only Reflects Decreases in Fair Value

The current model only accounts for decreases in the fair value of crypto assets, usually failing to capture the wild swings in value that crypto assets are known for.

Implications:

1. Unrealized Gains: Any increases in the value of the crypto asset are not recognized until you sell the asset, which means potential—unrealized—gains remain hidden.
2. Distorted Financial Statements: The current model does not reflect the true economics of the asset.
3. Stakeholder Information Gap: Stakeholders lack timely and relevant information, possibly affecting decision-making processes.

2. Complex and Costly Impairment Analyses

Given the volatile nature of crypto markets, triggering events for impairment under the indefinite-lived intangible asset model can be frequent and unpredictable, demanding rigorous and often expensive impairment analyses.

Operational Costs:

• Constant Monitoring: Accountants must continuously monitor the market for potential impairment triggers, adding to their workload.
• Regular Write-Downs: The requirement to "write down" asset values frequently increases operational costs, as each impairment analysis requires significant resources and time. These impairment charges are also never reversed under existing GAAP, even if the fair value of the crypto asset recovers during the same reporting period.

FASB's Crypto Accounting Project

Not being one to rest on its laurels, FASB recognized these challenges and inadequacies. So, in 2021, it took the bull by the horns and invited comments on the existing crypto asset accounting framework.

Key concerns raised during this exercise were clear cut:—current GAAP (Generally Accepted Accounting Principles) didn't accurately reflect the true economics of holding these dynamic assets. Rightfully, stakeholders said the impairment-centric model was out of sync with the volatile nature of crypto assets. Instead, those stakeholders indicated that a fair value model would better represent the economics of holdings in crypto assets.

Thus, against this backdrop of industry feedback and evolving needs, FASB set out to redefine accounting for crypto assets, leading directly to the new guidance by way of the accounting standards update.

Scope of ASU 2023-08

ASU 2023-08 casts a wide net, applying to all entities with crypto holdings. Thus, whether you're a public business entity, a private company, or even a not-for-profit, if crypto assets are part of your balance sheet, this ASU is your new playbook. 

Six Scope Criteria for Crypto Assets

First and foremost, you're in scope for ASU 2023-08 if you hold crypto assets that meet all of the following six scope criteria:

1.  Intangible Asset Definition: The crypto asset must meet the definition of intangible assets under the codification.
2.  Absence of Enforceable Rights: The holder must not have enforceable rights to underlying goods, services, or other assets. If your crypto gives you a claim to something tangible or a service, it's outside this standard's purview.
3.  Distributed Ledger Technology: The asset has to be created or reside in a distributed ledger based on blockchain or similar technology. This is fundamental—no blockchain, no dice.
4.  Secured by Cryptography: The asset must be secured by cryptography, underpinning its authenticity and integrity in the digital realm.
5.  Fungibility: Fungibility is a must. The asset should be interchangeable with another asset of the same type and value—like cryptocurrency, for instance, where one bitcoin equates to another.
6.  Exclusivity of Issuance: The reporting entity or its related parties cannot create or issue the asset.

This criteria is outlined in a new subtopic created by the ASU specifically for crypto assets—ASC 350-60. This dedicated corner of the guidance clarifies crypto asset accounting by providing a structured and coherent framework.  

Treatment of Assets Failing the Scope Criteria

Further, not all assets will make the cut under the new scope criteria. If you hold a crypto asset that is an intangible asset but does not pass the remaining criteria outlined above, you will continue to account for that asset as an indefinite-lived intangible asset under the previous cost-less-impairment model in ASC 350. This ensures no asset is left in a grey zone, dangling without definitive accounting treatment. Specifically:

• Non-Fungible Token (NFTs): NFTs are, to state the obvious, non-fungible by definition. Therefore, they're automatically excluded from the scope of ASU 2023-08. Each NFT is individually unique and indivisible, standing outside the fungible criteria required by the new standard.
• Wrapped Tokens: The standard doesn't explicitly define or address wrapped tokens, given their inherent complexity and variability in structure and rights. Wrapped tokens often use broader technological solutions and contractual rights, making their evaluation highly context-specific. So, whether a wrapped token meets the new criteria depends on individual facts and circumstances and may be accounted for under other US GAAP. 

Measurement of Crypto Assets under ASU 2023-08

Initial measurement under ASU 2023-08 doesn't veer from existing guidance outlined. Instead, other GAAP will apply depending on the facts and circumstances of how the crypto asset was acquired. For example: 

• Purchased crypto assets—ASC 350-30
• Acquired crypto assets in a business combination—ASC 805
• Acquired crypto assets received in exchange for goods or services—ASC 610 

Subsequent Measurement at Fair Value

Here's where things start to get exciting. The new ASU introduces a shift from cost less impairment to fair value for subsequent measurement.

1. Fair Value Changes Recognized in Earnings Each Reporting Period

Crypto assets will now be remeasured at fair value each reporting period. These changes aren't simply footnotes—they go straight to the P&L, directly impacting earnings. Each period's fair value change determined by the remeasurement, whether positive or negative, goes onto the income statement. This guidance applies whether or not the specific in-scope crypto asset has an active market or not.  

2. Application of Existing Fair Value Framework (ASC 820)

The fair value determination adheres to ASC 820's existing framework. Think of ASC 820 as the fair value rulebook for all asset types, crypto included. Here, you must consider market activity, pricing inputs, and adhering to levels of observable versus unobservable inputs for the fair value measurement.  

Where quoted prices exist in an active market for a crypto asset, reporting entities will need to use that input without any adjustment when measuring the subsequent fair value. However, if you find yourself holding a crypto asset without an active market, unfortunately, you’re not off the hook from having to determine its fair value.

While some stakeholders asked the FASB to consider an alternative measurement approach in these situations, the FASB ultimately decided not to provide any relief from having to determine the fair value of that asset under ASC 820. In their deliberations, the FASB decided that the existing fair value framework provided sufficient guidance to determine the fair value of the asset in these situations.  

3. Potential Net Income Volatility and Comparison to Equity Securities

Such consistent reevaluations introduce an element of volatility to net income, similar to equity securities. Given crypto's fluctuating nature, companies might see wild swings in their reported earnings. This volatility isn't just a theoretical concern; it's an intrinsic part of holding such high-flying assets that you must manage and communicate effectively.

Accounting for Transaction Costs

Handling the nuts and bolts—transaction costs, including commissions and other transaction fees—still adheres to established guidance as the FASB decided not to specifically address this in the new ASU:

1. Capitalization Based on ASC 350-30 or ASC 805-30

For most acquired crypto assets, transaction costs will be capitalized into the asset's initial cost basis based on the guidance in ASC 350-30.

2. Expensing for Crypto Assets Acquired in a Business Combination (ASC 805)

When a business combination involves crypto assets, expenses tied to acquiring these assets follow ASC 805's dictates. These aren't capitalized but expensed, reflecting the broader treatment of acquisition-related costs in such combinations.

Presentation and Disclosure Requirements for Crypto Assets

FASB's ASU 2023-08 also introduces key requirements for the presentation and disclosure of crypto assets, ensuring they're reported transparently and accurately.

Balance Sheet Presentation

To enhance clarity, ASU 2023-08 mandates that entities present the aggregate amount of crypto assets measured at fair value separately from other intangible assets on the balance sheet. This clear distinction helps stakeholders easily identify the value of crypto holdings distinct from other intangible assets you don't measure at fair value.

In addition, the ASU does not specifically address whether these assets should be classified as current or noncurrent on the balance sheet for those entities who present a classified balance sheet. However, given these assets meet the definition of an indefinite-lived intangible asset as part of the scoping assessment, it is generally presumed they will be presented as noncurrent in most cases.  

Income Statement Presentation

You must present changes in the fair value of crypto assets separately from changes in the carrying amount of other intangible assets, such as impairments and amortizations.

• Separate Presentation: The fair value changes of crypto assets should be distinctly outlined, helping to avoid mixing these changes with those of other intangible assets.
• Operating vs. Non-Operating Classification: While the standard isn't explicit, this area will require some judgment. In most cases, changes in the fair value of crypto assets will be presented in operating income, much like how you treat gains or losses from other investment holdings.

Statement of Cash Flows Presentation

• Existing Guidance: The new ASU provides limited guidance for specific cash flow presentation matters.  Therefore, existing guidance under ASC 230 will reign here for most circumstances.  
• Non-Cash Consideration: The new ASU explicitly provides guidance on non-cash consideration. For example, if you receive crypto assets as non-cash consideration in the ordinary course of business and those assets are nearly immediately converted into cash—within a few hours or days—you will classify those cash inflows as an operating activity.
• Trading Activities: Where companies acquire crypto assets for trading purposes, those cash inflows and outflows would generally be treated as operating activities consistent with existing cash flow guidance in ASC 230.  

Disclosure Requirements for Both Annual and Interim Periods

ASU 2023-08 also significantly ramps up disclosure requirements to ensure stakeholders have a clear view of an entity's crypto asset holdings and activities.

• Significant Holdings and Restrictions: Companies must disclose the name, cost basis, fair value, and number of units for each significant crypto asset holding as well as restrictions on their sale. This helps users of financial statements gauge the liquidity and potential limitations of these assets.
• Aggregated Values for Insignificant Holdings: Entities should disclose the aggregated cost basis and fair value of crypto assets that are not individually significant, offering a complete picture without overwhelming statement users in minutia.  Significance is based on the fair values of the assets.
• Contractual Sales Restrictions: Companies must also disclose those crypto assets with contractual restrictions on their sale, including the fair value of those assets, the nature of the restriction and the remaining duration of it, and any conditions of the restriction that could cause it to lapse. 

Additional Annual Disclosure Requirements

But wait, there’s more. The annual disclosures go into even more granular detail on an entity's crypto activities.

• Cost Basis Method: Entities must disclose the cost basis method used—e.g., first-in-first-out, specific identification, average cost, etc.—for disposing of crypto assets and computing any gain or loss on the disposal.
• Income Statement Line Items: Companies must clearly indicate which financial statement line item in the income statement crypto gains or losses are recorded if they aren't presented separately.
• Reconciliation of Crypto Asset Holdings: 
  • Companies must include a rollforward of their crypto asset holdings in the aggregate, showing additions, disposals, and remeasurement gains and losses, along with disclosure about the nature of the additions and disposals.
  • Remeasurement gains or losses must be shown in the rollforward on a gross crypto-by-crypto asset basis for each individual crypto asset holding with a net gain or net loss in the annual period.  
  • Companies must also disclose the total amount of (1) cumulative realized gains and (2) cumulative realized losses from disposition during the period. 

Through these robust presentation and disclosure requirements, ASU 2023-08 aims to provide clearer, more informative financial reporting for crypto assets, ensuring users can make informed decisions based on comprehensive and transparent annual financial statements. And that's nothing but good.

ASU 2023-08 Adoption and Transition

As we said, the new standard applies to all companies, regardless of their nature or size, including public companies, private companies, nonprofit organizations, and even employee benefit plans. This really speaks to the significance of crypto assets in today's financial landscape and the need for consistent and transparent accounting practices across the board.

That said, when it comes to keeping your own crypto accounting house in order, we have some key dates and insights for you:

Effective Date: Mark Your Calendars

Yes, the clock is already ticking. The standard becomes effective for both interim and annual reporting periods beginning after December 15, 2024. This obviously doesn't give companies much time to get their ducks in a row.

Early Adoption

Early adoption is permitted in any interim or annual period, provided the entity has yet to issue—or made available to issue—financial statements. If an entity adopts the ASU in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period.

Transition Method: Modified Retrospective Approach

Companies will apply the ASU on a modified retrospective method. This means recording a cumulative effect adjustment to the opening balance of retained earnings at the beginning of the year of adoption. That adjustment is calculated as the difference between the carrying amount of their in-scope crypto assets as of the beginning of the annual reporting period in which the entity adopts the ASU and the carrying amount of those crypto assets as of the end of the prior annual reporting period.

A Final Word

We get it—that's a lot to take in—but remember that you're not alone. The technical accounting gurus at Embark are always ready, willing, and able to guide you through the technical accounting weeds. So, as that deadline inches closer and closer and your workload gets heavier and heavier, don't hesitate to reach out to us. Those crazy crypto assets have nothing on you.