Chapter 7 — Effective Date and Transition Guidance for ASU 2023-08

7.2 Other Transition Considerations

7.2.1 Income Taxes

The cumulative-effect adjustment to retained earnings includes the offsetting entry for the difference between (1) the carrying amount of in-scope crypto assets held as of the end of the prior reporting period under the cost-less-impairment model and (2) the fair value of those in-scope crypto assets as of the beginning of the year in which the entity first applies ASU 2023-08. Note that any other adjustments related to balance sheet amounts that result from the adoption of the ASU (e.g., adjustments to DTAs as a result of the remeasurement of in-scope crypto assets) would also be included in the cumulative-effect adjustment to retained earnings upon adoption. Keep in mind that entities previously may have used, or been required to use, a mark-to-market method of accounting for digital assets for tax purposes. As a result, entities that have historically marked their digital assets to market for tax purposes may have a deferred tax impact that is eliminated upon subsequent measurement for crypto assets within the scope of the ASU. Entities should carefully consider and analyze the tax accounting methods used to ensure that the tax impacts of adoption are appropriately reflected in the financial statements.

Connecting the Dots

Entities adopting ASU 2023-08 should consider the potential effects (if any) of the 15 percent corporate alternative minimum tax (CAMT) on an applicable corporation’s adjusted financial statement income (AFSI).1 The current CAMT rules allow for no adjustment to financial statement income for unrealized mark-to-market gains or losses in the determination of AFSI (i.e., unrealized gains and losses from changes in the fair value of in-scope crypto assets within a taxpayer’s financial statement income after adoption of ASU 2023-08 are included in AFSI).

There are also specific rules for cumulative adjustments to retained earnings for a change in financial accounting principle, including the adoption of a new accounting standard, to prevent duplications or omissions of items. Accordingly, any cumulative adjustment to retained earnings recorded as a result of adopting ASU 2023-08 would generally be included in AFSI over a four-year period (if the adjustment results in an increase in AFSI) or in the year of adoption (if the adjustment results in a decrease in AFSI). For more information, see Deloitte’s December 22, 2023, Tax Alert and September 20, 2023, Tax Alert.

7.2.2 Hedge Accounting

Before the issuance of ASU 2023-08, an entity could designate crypto assets in a hedging relationship (e.g., crypto asset borrowings — see Chapter 8) for certain crypto transactions; accordingly, the hedged crypto assets could be remeasured at fair value. After adopting the ASU, an entity is required to remeasure any crypto assets within the scope of the new guidance at fair value through earnings. Thus, the in-scope crypto assets are not eligible to be designated as a hedged item under ASC 815-20-25-43(c)(3), since hedge accounting is no longer needed once the fair value measurement occurs.

Whenever an entity ceases hedge accounting for a fair value hedge, the fair value of the hedged item (the in-scope crypto asset) forms its new cost basis. Therefore, an entity would not need to adjust the carrying basis of the in-scope crypto assets after adopting the ASU. For more information about the guidance on hedging, see Deloitte’s Roadmap Hedge Accounting.

Connecting the Dots

While the hedge accounting guidance requires that the gain or loss on the hedging instrument and that on the hedged item be recorded in the same financial statement line item, an entity might record remeasurement gains and losses on in-scope crypto assets in a line item separate from that for derivative gains and losses on a bifurcated embedded derivative related to an obligation to return in-scope crypto assets. As a result, the presentation of previously hedged crypto assets before adoption of ASU 2023-08 could differ from that after adoption of the ASU.

7.2.3 Interim and Year-End Disclosures in the Year of Adoption

In the year of adoption, an entity should provide both annual and interim disclosures in the first interim period after the adoption of ASU 2023-08 and in each subsequent quarter. SEC rules and staff interpretations require SEC registrants to provide both annual and interim disclosures in the first interim period after the adoption of a new accounting standard and in each subsequent quarter in the year of adoption. Specifically, Section 1500 of the SEC Division of Corporation Finance’s Financial Reporting Manual (FRM) states:

[Regulation] S-X Article 10 requires disclosures about material matters that were not disclosed in the most recent annual financial statements. Accordingly, when a registrant adopts a new accounting standard in an interim period, the registrant is expected to provide both the annual and the interim period financial statement disclosures prescribed by the new accounting standard, to the extent not duplicative. These disclosures should be included in each quarterly report in the year of adoption.

Accordingly, in the year in which an entity adopts ASU 2023-08, it must provide the interim and annual disclosures required by ASC 350-60-50 in each interim period.

As discussed in Section 6.3, the ASU requires a reconciliation, in the aggregate, of activity from the opening balance to the closing balance of in-scope crypto assets. In such a reconciliation, an entity should disclose, on a crypto-asset-by-crypto-asset basis, the gains and losses from remeasurement that are included in net income.

This reconciliation can be presented in various formats. For example, for the second quarter ending on June 30, 20X2, it can be presented as follows:

Each quarterly reconciliation in a tabular format (e.g., rollforward from January 1, 20X2, to March 31, 20X2, to June 30, 20X2).
A year-to-date reconciliation in a tabular format (e.g., rollforward from January 1, 20X2, to June 30, 20X2).
A quarter-to-date and year-to-date reconciliation in a tabular format (e.g., April 1, 20X2, to June 30, 20X2, and January 1, 20X2, to June 30, 20X2).

In the list above, the third option represents a combination of the first and second options. See Section 6.3.5 for an example illustrating how an entity can present the reconciliation in this format. It may be beneficial for entities to consider whether previous filings included quarter-to-date information if they choose to present only a year-to-date reconciliation (the second option above).

7.2.4 Supplementary Financial Information

In an offering or in the first Form 10-K after adoption in the year of adoption, entities should consider the applicability of SEC Regulation S-K, Item 302, to supplementary information.

Under Regulation S-K, Item 302(a),2 if an entity reports a material retrospective change (or changes) “for any of the quarters within the two most recent fiscal years,” the entity must disclose (1) an explanation for the material change(s) and (2) summarized financial information reflecting such change(s) for the affected quarterly periods, including the fourth quarter. Summarized financial information, which is required in a Form 10-K and certain registration statements, should include, at a minimum:

Net sales or gross revenues.
Gross profit (or costs and expenses related to net sales or gross revenues).
Income (loss) from continuing operations.
Net income (loss).
Net income (loss) attributable to the entity.

Since this requirement only applies when there is a material retrospective change, an entity may not have provided such information in its most recent Form 10-K. However, upon reporting a material retrospective change, an entity would be required to include such disclosure in its next Form 10-K or in conjunction with reissuance of its annual financial statements in certain registration statements. However, an entity should consult with its legal counsel and independent auditor regarding the appropriate disclosure to provide in the new registration statement.

An entity will also need to consider, in the year of adoption, other sections of the Form 10-Q that could need to be updated (e.g., Item 3, “Quantitative and Qualitative Disclosures About Market Risk,” or Item 4, “Controls and Procedures”) as a result of the adoption of ASU 2023-08.

Footnotes

The CAMT was introduced by the Inflation Reduction Act of 2022 and is effective for taxable years beginning after December 31, 2022. A corporation is subject to the CAMT for a taxable year if it passes the average annual AFSI test for one or more taxable years that precede that taxable year and end after December 31, 2021 (i.e., the $1 billion three-year average annual AFSI test).

Smaller reporting companies and foreign private issuers are exempt from the requirements in SEC Regulation S-K, Item 302.

Confidential and Proprietary — for Use Solely by Authorized Personnel

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.