C.5 Presentation and Disclosure

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C.5 Presentation and Disclosure

C.5.1 Balance Sheet Classification

The safeguarding obligation will generally be classified on the balance sheet in accordance with the terms of the custodial arrangement. We would expect the classification of the safeguarding asset to be consistent with that of the safeguarding obligation.

SAB 121 required entities that safeguard crypto assets to record a safeguarding obligation and corresponding asset on their balance sheets. Since safeguarding liabilities and the corresponding assets are measured at the fair value of the digital assets held, such entities are required to provide disclosures regarding fair value measurements under ASC 820. Therefore, questions may arise regarding the relationship between the requirements in SAB 121 and those in ASC 350-60.

As discussed in SAB 121, the safeguarding asset is not the crypto asset that is being safeguarded. Therefore, safeguarding assets within the scope of SAB 121 are not subject to the disclosure requirements in ASC 350. However, the safeguarding asset is subject to the disclosure requirements in ASC 820. In addition, safeguarding assets should be presented separately from crypto assets on the balance sheet.

C.5.2 Cash Flow Reporting

For cash flow reporting purposes, the initial recognition of the safeguarding liability and safeguarding asset is a noncash event. Since the event is operating in nature, it will generally not need to be separately disclosed under ASC 230. To the extent that there are differences in the remeasurement of the safeguarding asset and liability in future periods (e.g., those driven by a loss event), such differences may be presented net as a reconciling item in the operating section of the cash flow statement.

C.5.3 Disclosures

As discussed below, SAB 121 required entities to provide a significant number of additional disclosures related to safeguarding obligations for crypto assets held.

C.5.3.1 Financial Statement Footnote Disclosures

SAB 121 indicated that an entity should disclose the following in the footnotes to its financial statements:

The “nature and amount of crypto-assets that [the entity] is responsible for holding . . . , with separate disclosure for each significant crypto-asset.”
Vulnerabilities “due to any concentration in such activities” (see ASC 275-10-50 and IAS 1).
Fair value disclosures related to the “crypto-asset safeguarding liabilities and the corresponding assets” (see ASC 820).
Description of the “accounting for the liabilities and corresponding assets” (see ASC 235-10-50 and IAS 1).

In connection with the above disclosures, entities should also consider disclosing the following:

Who holds the cryptographic key information.
Who maintains the internal recordkeeping for the crypto assets.
Who is obligated to secure the assets and protect them from loss or theft.

Connecting the Dots

Determining the fair value of crypto assets may be complex. In making this determination, an entity may need to carefully consider how to apply ASC 820 to these types of assets. For example, the entity may find it challenging to determine its principal market.8 Further, it may be difficult to determine whether a loss event has occurred as well as the value of the loss; an entity may need to consult specialists in making this determination. The AICPA Practice Aid contains additional nonauthoritative guidance related to fair value measurements for crypto assets that an entity may want to consider.

C.5.3.2 Disclosures Outside the Financial Statements

As indicated in SAB 121, an entity may be required to provide the following disclosures outside its financial statements (i.e., description of the business [see SEC Regulation S-K, Item 101]; risk factors [see SEC Regulation S-K, Item 105]; or MD&A [see SEC Regulation S-K, Item 303]):

“[S]ignificant risks and uncertainties associated with the entity holding crypto-assets.”
If material, “the types of loss or additional obligations that could occur, including customer or user discontinuation or reduction of use of services, litigation, reputational harm, and regulatory enforcement actions.”
“[D]iscussion of the analysis of the legal ownership of the crypto-assets held,” including consideration of what would happen in the event of the entity’s bankruptcy.
“[P]otential impact that the destruction, loss, theft, or compromise or unavailability of the cryptographic key information would have to the ongoing business, financial condition, operating results, and cash flows of the entity.”
If material, “information about risk-mitigation steps the entity has put in place,” such as insurance coverage.

Footnotes

See Section 4.2.1 for more information about fair value measurement and Section 4.3 for further details on determining the principal market.

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.