FASB Issues Final Standard on Crypto Assets (December 15, 2023)

While the new guidance applies to assets that meet the scope criteria in ASC 350-60, not all digital assets will meet these criteria. Because the guidance only applies to “fungible” digital assets that meet the definition of an intangible asset, questions will remain about how entities should account for and disclose other types of digital 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, wrapped tokens4 are generally outside the scope of the guidance since, as the FASB observed, such tokens may provide their holders with a right or a claim on another asset (i.e., the underlying wrapped crypto asset). Because crypto assets can be wrapped in different ways, the Board was concerned that expanding the scope to include wrapped tokens could have unforeseen consequences. As a result, 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 scope of the amendments. An entity will need to use judgment in accounting for wrapped tokens.

The ASU’s amendments 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. The entity therefore would be required to apply the traditional intangible asset model to such assets, as appropriate, even if they are otherwise within the scope of the amendments. Paragraph BC15 of the ASU’s Background Information and Basis for Conclusions explains that the Board decided to exclude 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 and others did not support measuring crypto assets created or issued by a reporting entity or its related parties at fair value.”

The ASU addresses subsequent, but not initial, measurement of crypto assets. Entities are expected to continue to apply the guidance in ASC 350-30 when initially measuring intangibles other than goodwill, including crypto assets within the scope of ASC 350-60. Accordingly, there may be situations in which an entity acquires and initially measures a crypto asset at an amount that differs from the asset’s fair value at the time of initial recognition. Because the entity is required to subsequently measure the crypto asset at fair value, it may have 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 amendments require that fair value changes in crypto assets be presented within net income. Although the ASU does not stipulate whether fair value changes should be presented as operating or nonoperating income, the Board stated in the ASU’s Background Information and Basis for Conclusions that the correct presentation would be based on facts and circumstances. If an entity presents operating income, the determination of whether fair value changes should be presented as operating or nonoperating income should be based on (1) how the entity is using the crypto asset (e.g., trading vs. holding for investment purposes) and (2) whether crypto assets are a core part of the entity’s business.

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 ASU’s Background Information and Basis for Conclusions indicates that if the disclosure requirements in industry-specific guidance differ from those in the ASU, companies subject to that guidance should continue to follow it as well.

Entities adopting the new ASU 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).6 Although the IRS and U.S. Treasury Department are expected to issue proposed regulations in late 2023 or early 2024, the current CAMT rules allow for no adjustment to financial statement income for unrealized mark-to-market gains or losses in the determination of ASFI (i.e., unrealized gains and losses from changes in the fair value of 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 September 30, 2023, Tax Alert.