9.4 Accounting Considerations
9.4.1 Safeguarding Liability
Regarding safeguarding obligations and the corresponding assets, SAB 122 states,
in part:
Upon application of the rescission of [SAB 121], an entity that has
an obligation to safeguard crypto-assets for others should determine whether
to recognize a liability related to the risk of loss under such an
obligation, and if so, the measurement of such a liability, by applying the
recognition and measurement requirements for liabilities arising from
contingencies in [ASC 450-20] or [IAS 37] under U.S. generally accepted
accounting principles and IFRS Accounting Standards, respectively.
Connecting the Dots
Given the rescission of SAB 121, we expect that an entity will remove its
safeguarding obligation and corresponding asset from its balance sheet.
However, if a loss contingency exists at the time of removal, the entity
would record a liability under ASC 450. ASC 450 requires an entity to
record an accrual for a loss contingency when (1) it is probable that a
loss has been incurred and (2) the amount can be reasonably estimated.
An entity that has not suffered a loss event would not be expected to
record a liability when adopting SAB 122. For more information about
loss contingencies, see Deloitte’s Roadmap Contingencies, Loss Recoveries, and
Guarantees.
9.4.2 Change in Accounting Principle
SAB 122 states that “[e]ntities should include clear disclosure
of the effects of a change in accounting principle upon initial application of
this rescission.” As is consistent with SAB 122, ASC 250-10-45-5 indicates that
an entity that is reporting a change in accounting principle should apply the
change retrospectively2 “unless it is impracticable to do so;” however, we would expect such
situations to be rare. ASC 250-10-45-5 goes on to state that an entity is
typically required to provide the following:
- The cumulative effect of the change . . . on periods prior to those presented . . . in the carrying amounts of assets and liabilities as of the beginning of the first period presented.
- An offsetting adjustment . . . to the opening balance of retained earnings . . . for that period.
- [F]or each individual prior period presented [in the financial statements, adjustments] to reflect the period-specific effects of applying the new accounting principle.
Entities should include all applicable disclosures regarding a change in
accounting principle (see Section 9.4.4).
9.4.3 Previously Recorded Loss Events
In a manner similar to that described in ASC 805 and IFRS 3, the measurement of
the safeguarding asset under SAB 121 factored in any potential loss events that
would have resulted in an impairment of the asset; such a charge would have been
reflected in the income statement. The occurrence of a loss event would result
in a difference between the safeguarding asset and safeguarding liability under
SAB 121. If no potential loss events occurred in a given reporting period, there
would be no net effect on the income statement (i.e., net zero impact).
However, in a manner consistent with retrospective application, companies must
reanalyze any loss events reported in prior periods to determine the appropriate
accounting for any loss event (i.e., an entity would need to assess the
previously recorded SAB 121 asset impairment under ASC 450-20).
9.4.4 Disclosures
SAB 121 required entities to provide a significant number of
disclosures both in the footnotes to the financial statements and outside the
financial statements. While SAB 122 highlights the importance of disclosures, it
does not contain any new crypto disclosure requirements to apply upon adoption
of SAB 122. Regarding disclosures, SAB 122 states, in part:
Entities should include clear disclosure of the effects of a change in
accounting principle upon initial application of this
rescission[3]. . . . The staff reminds entities that they should
continue to consider existing requirements to provide disclosures that allow
investors to understand an entity’s obligation to safeguard crypto-assets
held for others. These requirements include, but are not limited to, Items
101, 105, and 303 of Regulation S-K[4]; [ASC 450-20]; and [ASC 275].
Upon adoption of SAB 122, an entity should consider the disclosure requirements
in ASC 250-10-50-1 related to a change in accounting principle. Further, the
entity should assess whether any of the information previously required by SAB
121 is relevant to users of its financial statements and should therefore
continue to be disclosed. Such information may be consistent with information
disclosed about ongoing risks and uncertainties in accordance with the
guidelines in ASC 275.
For additional considerations related to risks and uncertainties, see Deloitte’s
Roadmap SEC Comment Letter Considerations,
Including Industry Insights.
Footnotes
2
The ASC master glossary defines retrospective application as “[t]he
application of a different accounting principle to one or more
previously issued financial statements, or to the statement of financial
position at the beginning of the current period, as if that principle
had always been used, or a change to financial statements of prior
accounting periods to present the financial statements of a new
reporting entity as if it had existed in those prior years.”
3
Entities should consider the guidance in ASC 250-10-50-1 through 50-3
and IAS 8 on a change in accounting principle, as well as SEC
Regulation S-K, Item 302 (on supplementary financial information),
and paragraph 8 of PCAOB Auditing Standard (AS) 2820 (on evaluating
consistency of financial statements).