Crypto, Equity Accounting Among Top Agenda Requests for US Board

Cryptocurrency, financial instruments, and companies’ cash flow details are among the hot-button issues groups pushed the US accounting standard-setter to add to its to-do list.

At least 80 accounting firms, investor groups, and professional associations weighed in on the Financial Accounting Standards Board’s request for input on what it should tackle going forward. Responses ranged from requests to define certain terms to recommendations for larger revamps of reporting methods.

While Big Four accounting giants Deloitte & Touche LLP and PricewaterhouseCoopers LLP prioritized amending accounting for asset acquisitions, JPMorganChase and Wells Fargo & Co. pushed FASB to reassess the current guidance for hedge accounting.

FASB’s last formal request for feedback on its agenda, in 2021, spurred landmark guidance on accounting for cryptocurrency holdings. It also sparked ongoing projects related to environmental credits and government grants.

The time is ripe to review parts of US generally accepted accounting principles, or GAAP, that have become akin to “Frankenstein’s monster,” said Scott Ehrlich, founder and managing director of educational organization Mind the GAAP LLC.

Ehrlich said FASB’s targeted improvement projects are helpful, but “at this point, there’s some older pieces of GAAP that just need a refresh.”

Financial Instruments

Many respondents asked FASB to clear up its notoriously complex rules over how to distinguish between contracts classified as liabilities or equity.

Hundreds of special purpose acquisition companies stumbled on this in 2021, when US Securities and Exchange Commission staff warned many were incorrectly accounting for warrants, which can act as investor incentives.

FASB opted in 2022 to drop from its agenda a project to clean up more guidance governing liabilities versus equity.

The current model has evolved into a rules-based framework that lacks a clear conceptual foundation and can be costly to apply, according to PwC’s comment letter.

Crowe LLP said it would support a “comprehensive overhaul” to create a simpler framework if investors saw it fit, even if that would lead to more instruments classified as equity.

Another aspect of financial instrument-related guidance—hedge accounting—was cited by RSM US LLP, the American Bankers Association, and others as a priority for FASB to improve.

Businesses can buy futures, options, or swaps to offset risks. These contracts qualify as derivatives, and accounting rules require them to be measured at fair value, a measure of current market value. Some strategies for managing risk can qualify for hedge accounting, a specialized method allowing businesses to shield earnings from fluctuations.

FASB recently advanced to final steps a project that will mean more transactions qualify for the method.

The model remains “overly prescriptive and misaligned with real-world risk management practices,” RSM US’s letter said.

Crypto

FASB should expand its crypto guidance beyond the 2023 rules, financial technology firms and accounting groups said.

Companies holding Bitcoin or Ethereum are required under the board’s first crypto rules to record their coins at fair value, capturing the highs and lows of their holdings.

FASB was able to issue the guidance expeditiously because its scope was intentionally narrow, said Aaron Jacob, vice president of enterprise accounting solutions at digital asset compliance firm Taxbit.

The board should focus on unresolved areas, Taxbit said, such as financial reporting for stablecoins, which have their value pegged to another asset class.

Guidance should also be expanded to address the derecognition of crypto intangible assets, according to a statement from Kimber Bascom, KPMG US’s deputy chief accountant and accounting standards leader.

Equity Method

The equity method of accounting—in which companies report investments in other entities in which they have significant, but not controlling, interests—leads to outcomes that aren’t necessarily reflective of the economics of companies’ investments, said Jeffrey Johanns, chair of the Texas Society of Certified Public Accountants’ professional standards committee.

Johanns’ group and Grant Thornton LLP supported generally eliminating the method—with certain caveats.

“Many real estate investments are operated at a loss, so the investment gets written down, but in reality, the real estate—its fair value as an income-producing property—may be increasing,” said Johanns, an associate professor of accounting at the University of Texas at Austin.

American Express Co., on the other hand, supported the framework, calling for changes to simplify requirements and lessen operational burdens.

Greater Transparency

Climate and investor groups focused on what they said is insufficient transparency around asset retirement obligations, or AROs, which are legal obligations associated with the retirement of long-lived assets where companies will be responsible for removing equipment or hazardous materials.

These obligations can be significant for companies that own large assets, such as those in the oil and gas and nuclear energy sectors, according to a joint letter from Ceres, Carbon Tracker, and the Climate Accounting and Audit Project.

However, current rules allow companies to omit material AROs from their balance sheets by citing uncertainty in retirement timing, KBI Global Investors said. The firm was among more than 40 investors who wrote to the SEC about the topic last October.

In a statement, the consumer advocacy group Public Citizen called the existing rules a “loophole” that allows the fossil fuel industry to avoid acknowledging future costs of cleaning up assets like oil refineries and pipelines, increasing risks for investors. The group’s letter said FASB should require companies to recognize the fair value of all AROs.

The investment professional association CFA Institute said members it surveyed seek further disclosure in the statement of cash flows, which tracks cash that’s generated and spent. Their priorities included improved disclosure of non-cash items and disaggregation of investing cash flows.

The document “should be a critical statement that investors rely on,” Canadian Accounting Standards Board chair Armand Capisciolto said.

The Canadian board told FASB it should consider aligning any future updates to the statement of cash flows with the International Accounting Standards Board’s efforts for greater comparability in financial reporting.

FASB will now discuss the groups’ input in its public meetings as it sets its future priorities.