C.3 Scope Considerations
SAB 121 applied to entities that filed with the SEC under either U.S. GAAP or IFRS
Accounting Standards. Further, the SAB was applicable when an entity’s financial
statements were filed with the SEC in accordance with SEC Regulation S-X, Rules 3-05
and 3-09.
As discussed in more detail below, the SAB applied to a public business entity that
safeguards crypto assets, regardless of whether the safeguarding was provided by the
entity or by an agent acting on behalf of the entity. Although the SAB did not
explicitly mention broker-dealers in its scope discussion, the SEC has confirmed
that the SAB also applied to regulated broker-dealers.
An entity does not need to be a legal custodian or offer custodial services to have
an obligation to safeguard crypto assets. For example, in certain scenarios
involving introducing parties (parties that connect a customer with a custodian),
the SEC had deemed that the SAB was applicable because of certain involvement by the
introducing party in the transaction flow and concerns about customer
perception.
Connecting the Dots
While most private companies were not required to apply the SAB, they were
permitted to do so. SAB 121 included specific transition guidance for
certain private companies whose financial statements were filed with the
SEC. Furthermore, private companies that were considering an initial public
offering should have considered the potential impact of SAB 121 on their
financial statements, footnotes, and disclosures as well as the related
internal control over financial reporting (ICFR).
SAB 121 defined a crypto asset as follows:
For purposes of this SAB, the term
“crypto-asset” refers to a digital asset that is issued and/or transferred using
distributed ledger or blockchain technology using cryptographic techniques.
The AICPA Practice Aid defines and
uses the term “crypto asset” in the context of classification, measurement, and
recognition. However, under the SAB, the term should be interpreted more broadly and
can include, for example, stablecoins and NFTs. See Question 1 in the Accounting
Questions and Answers section in Appendix B of the AICPA Practice Aid for more
information.
If the entity in question was subject to the SAB, the next step involved evaluating
several key factors to determine whether the entity had a safeguarding obligation to
a third party, either directly or through an agent. Question 7 in Appendix B of the
AICPA Practice Aid lists the factors that an entity should consider in determining
whether a safeguarding obligation exists. This evaluation should be based on the
totality of the evidence; no individual factor is determinative.
Although the determination of whether an entity has an obligation to safeguard crypto
assets will depend on the specific facts and circumstances, the response to Question
7 in Appendix B of the AICPA Practice Aid contains the following nonexhaustive list
of factors to consider in this determination:3
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“The nature [and level] of the entity’s involvement (including that of its agents) with the safeguarded assets.”
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“The contractual terms of the arrangement with the third party whose assets are being safeguarded [or] other parties involved in the safeguarding of the assets.”
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“The perception of the third parties whose ‘crypto-assets’ are being safeguarded.”
All entities that have an obligation to safeguard crypto assets should record a
liability and corresponding asset on their balance sheet at the fair value of the
crypto assets. Accordingly, in certain situations, more than one entity may
recognize a safeguarding liability for the same crypto assets (i.e., custodian and
subcustodian).4 The section below discusses accounting considerations related to this topic.