2.3 Crypto Assets Within the Scope of ASU 2023-08

Before an entity is required to account for crypto assets in accordance with ASU 2023-08 (codified in ASC 350-60), the following additional criteria must be met (outlined in ASC 350-60-15-1) after the ASU becomes effective:

The crypto assets meet the definition of “intangible assets” in the ASC master glossary (see Section 2.2.2).
The asset holder does not have enforceable rights to or claims on underlying goods, services, or other assets (see Section 2.3.1).
The assets are created or reside on a distributed ledger based on blockchain or a similar technology.
Cryptography is used to secure the assets.
The assets are fungible (see Section 2.3.2).
The reporting entity or its related parties do not create or issue the assets5 (see Section 2.3.3).

Digital assets that do not meet these criteria are accounted for in accordance with (1) ASC 350-30 if they meet the definition of an intangible asset or (2) other Codification topics if they do not.

Connecting the Dots

When determining the accounting for and disclosure of digital assets, an entity should start by assessing the scope criteria in ASU 2023-08. A crypto asset that is within the scope of ASC 350-60 is subject to all of that subtopic’s measurement (see Chapters 3 and 4) and disclosure (see Chapter 6) requirements. Conversely, none of the guidance in ASC 350-60 would apply to a digital asset that is not within the ASU’s scope. Accordingly, entities should consider whether the disclosure requirements in other relevant GAAP apply to digital assets that are outside the scope of ASC 350-60.

In assessing whether crypto asset holdings meet the scope criteria in ASC 350-60, an entity may be required to consider the crypto asset holder’s specific facts and circumstances; the same crypto asset could meet the scope criteria in ASC 350-60-15-1 for one crypto asset holder but may not for another crypto asset holder. For example, an entity that issues a crypto asset would conclude that the criterion in ASC 350-60-15-1(f) is not met for its holdings of that asset, whereas another entity that is not the issuer of the crypto asset or a related party of the issuer most likely would conclude that the criterion in ASC 350-60-15-1(f) is met for its holdings of that asset.

2.3.1 Enforceable Rights to or Claims on Underlying Goods, Services, or Other Assets

Since one of the scope criteria in ASU 2023-08 is that a digital asset does “not provide the asset holder with enforceable rights to or claims on underlying goods, services, or other assets,” questions may arise about the accounting for and disclosure of certain digital assets, such as stablecoins and wrapped tokens.

The term “wrapped token” generally describes a digital asset that provides an enforceable right on the value of another digital asset or in-scope crypto asset and may provide the holder with the same enforceable right to or claim on the underlying asset. Although the FASB did not specifically exclude wrapped tokens from the scope of ASU 2023-08, the Board’s proposed ASU on crypto assets noted that wrapped tokens were not expected to be within the scope of the new guidance. While the final ASU does not specifically refer to this scope exclusion, ASC 350-60-15-1(b) indicates that a crypto asset is not within the scope of the amendments if it “provide[s] the asset holder with enforceable rights to or claims on underlying goods, services, or other assets,” regardless of whether the underlying assets themselves are within the guidance’s scope. As a result, entities should carefully evaluate, on an asset-by-asset basis, whether a wrapped token provides any enforceable rights to or claims on other assets (i.e., the underlying wrapped crypto asset).

Connecting the Dots

A stablecoin is a digital asset whose value is designed to track the price of a traditional asset, such as a fiat currency (e.g., the U.S. dollar) or a commodity, to minimize price volatility associated with the underlying asset. An entity must evaluate the rights and obligations associated with stablecoins to determine how to account for them. Some stablecoins may be classified as financial assets or financial instruments, while others may meet the definition of intangible assets but may not meet all the scope criteria in ASC 350-60, particularly if they provide the holder with enforceable rights to or claims on other assets. For example, a stablecoin may be collateralized and redeemable for the asset(s) used to collateralize it. An entity will need to use judgment in determining whether to use the traditional intangible asset model or another accounting model to account for stablecoins.

For more information about stablecoins, see the AICPA Practice Aid.

2.3.2 Fungibility

One of the scope criteria in ASU 2023-08 is that a digital asset must be “fungible.” Questions may arise about the meaning of this term. While fungible tokens are interchangeable and not unique, an NFT is a unique, cryptographic unit of data that exists on a distributed ledger and cannot be replicated. An NFT could represent a right or a bundle of rights, such as a right to physical goods (e.g., branded clothing or physical artwork), access to a virtual concert, a lifetime membership to an elite club, and other items that could include services to be received in the future. For more information about accounting considerations related to NFTs, see Deloitte’s June 21, 2022, Accounting Spotlight.

Certain digital assets other than traditional NFTs also might not meet the fungibility criterion (e.g., certain prelaunch tokens). An entity must carefully consider each individual digital asset to determine whether it meets the fungibility criterion and therefore is within the scope of the ASU.

2.3.3 Tokens Created or Issued by the Reporting Entity or Its Related Parties

The amendments in ASU 2023-08 do not apply to assets that the reporting entity (or its related party) has issued or created, even if those entities have obtained the assets from an unrelated third party (i.e., the entity created the digital asset, sold the asset, and subsequently reacquired it at a later date in a market transaction). Therefore, the entity would be required to apply the traditional intangible asset model to such assets, as appropriate, even if the assets would have otherwise been within the scope of the amendments had they not been initially issued or created by the reporting entity. Paragraph BC15 of the ASU explains that the Board decided to exclude assets created or issued by the reporting entity or its related party from the scope of the amendments because “stakeholders did not ask that the Board address the issuer’s accounting” and “issuers and others did not support measuring crypto assets created or issued by a reporting entity or its related parties at fair value.” Although the determination of whether a reporting entity issued or created a digital asset often may be straightforward, it may be more complex when another party is involved (i.e., involved in the development of a new protocol and a digital asset that will ultimately be decentralized). A reporting entity should carefully consider the definition of a related party in evaluating various arrangements associated with the digital asset and related protocol creation.

Connecting the Dots

ASU 2023-08 explains that the previous cost-less-impairment accounting model, which took into account only decreases in the value of crypto assets, did not result in decision-useful information for investors. Accordingly, the ASU introduces a fair value model, which is intended to yield “relevant information that reflects (1) the underlying economics of those assets and (2) an entity’s financial position.” However, a fair value model could lead entities to artificially inflate income by continually issuing tokens. Therefore, in-scope crypto assets must not be “created or issued by the reporting entity or its related parties.”

Footnotes

A reporting entity that performs mining or validating services, and that receives newly created crypto assets as consideration for those services, would not be deemed the creator of those crypto assets as long as the services constitute the entity’s only involvement with the creation of the asset.

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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.