FASB Proposes Guidance on Crypto Assets (March 27, 2023)

Because the proposed ASU only applies to “fungible” crypto assets that meet the definition of an intangible asset, questions remain about how entities should account for and disclose other types of crypto assets, such as nonfungible tokens (NFTs). Financial statement preparers accounting for NFTs will need to fully understand the rights associated with these tokens and what is being transferred through them. For more information about accounting considerations related to NFTs, see Deloitte’s June 21, 2022, Accounting Spotlight.

In addition, it appears as though wrapped tokens4 would be outside the scope of the proposed ASU as the FASB board (“the Board”) observes that wrapped tokens may provide their holders with a right or a claim on another asset (i.e., the underlying wrapped crypto asset). Because there could be different ways in which crypto assets are wrapped, the Board is concerned that expanding the scope to include wrapped tokens could result in consequences that have not been fully evaluated. As a result, under the proposed ASU, an entity may need to use the traditional intangible asset model or another accounting model to account for the wrapped token (depending on its nature) even if the underlying crypto asset is within the proposal’s scope. An entity will need to use judgment in accounting for wrapped tokens.

The proposed amendments would not apply to crypto assets that the reporting entity (or its related party) has issued or created, even if those entities have obtained the crypto assets from an unrelated third party. The entity therefore would be required to apply the traditional intangible asset model to those assets, as appropriate, even if they are otherwise within the scope of the proposed amendments. The FASB explained in the proposed ASU’s Background Information and Basis for Conclusions that it decided to exclude crypto assets created or issued by the reporting entity or its related party from this amendment because “stakeholders did not ask that the Board address the issuer’s accounting” and “issuers did not support measuring crypto assets created or issued by a reporting entity or its related parties at fair value.”

The proposed ASU does not provide guidance on how an entity would initially measure crypto assets upon recognition. Instead, the proposed ASU indicates that other U.S. GAAP would apply to initial measurement of such assets. Consequently, there may be situations in which an entity initially measures a crypto asset at an amount that differs from the asset’s fair value at the time of initial recognition, depending on the facts and circumstances of the arrangement. Such a difference, coupled with the requirement to subsequently measure the crypto asset at fair value, could lead the entity to recognize a change in the asset’s measurement from its initial measurement even though the asset’s fair value has not changed.

The Board acknowledged that some stakeholders were concerned about the net income volatility that could result from presenting fair value changes in net income. However, the Board believes that the benefits derived from holding a crypto asset are similar to those derived from holding equity securities that have a readily determinable fair value (i.e., holding and selling crypto assets at an appreciated value). As a result, the proposed ASU requires that fair value changes in crypto assets be presented within net income. However, the proposed ASU does not stipulate whether fair value changes should be presented as operating or nonoperating income. To determine the correct presentation, an entity would need to use judgment and consider both the nature of the crypto assets and, as applicable, the guidance in SEC Regulation S-X, Rule 5-03,5 if a subtotal line item of operating income is presented.

Further, in considering a particular situation in which the economics of the activity would not be appropriately reflected, the FASB decided to require entities to present, as operating cash inflows, the cash receipts from the nearly immediate6 sale of crypto assets that were received as noncash consideration in the ordinary course of business. In this situation, an entity would, in the normal course of business, receive crypto assets as noncash consideration for a revenue-generating activity (e.g., mining). If the entity were to immediately convert the crypto assets it just received for cash, the cash flows associated with converting the crypto assets would be presented as investing cash flows under current guidance, an outcome that the Board believes would not represent the economics of the transaction. Accordingly, the proposed ASU requires an entity to classify as operating cash flows the cash receipt from the sale of those crypto assets that are received as noncash consideration if the crypto assets are sold nearly immediately for cash.

The disclosure requirements also apply to companies subject to other industry-specific guidance since the Board believes that investors would benefit from the enhanced disclosures. The proposed ASU’s Background Information and Basis for Conclusions indicates that if the disclosure requirements in industry-specific guidance differ from those in the proposed ASU, companies subject to the industry-specific guidance should continue to follow that guidance as well.

Entities should also comply with the disclosure requirements of other Codification topics if it is appropriate to do so (e.g., ASC 820’s fair value measurement disclosure requirements for both interim and annual reporting periods).