New Crypto Accounting Rules Monumental But Still Need Expertise

The cryptocurrency industry requires strong transparency and trust. The avenues for this include regulation and expertise that build these into their processes and output. The Financial Accounting Standards Board requirements issued Dec. 13, 2023 are a compelling example of how to achieve this.

The new accounting guidance for crypto assets brings discussions about fair value back in ways that haven’t been seen since post-mortem conversations about the financial crisis of 2009. US generally accepted accounting principles require a large subset of crypto assets to be reported at fair value.

This is a landmark change, achieved in a remarkably short time, that has some unique considerations for crypto assets. And, in addition to fair value itself, the process for improving financial reporting and implementing the changes is worth discussing.

FASB’s new requirements have a renewed emphasis on fair value and enhanced presentation and disclosures, and will require expertise in both accounting and crypto assets themselves.

Fair Value

FASB stated that existing fair value accounting is well-understood and remains robust enough to handle crypto asset valuation, thoughtfully considering the pros and cons of applying this guidance.

The pros included a long-standing standard that has served the marketplace efficiently and effectively for decades. The cons included that crypto assets and their markets can have important differences from traditional finance.

Fair value accounting sounds relatively straightforward: Identify the principal market based on an asset’s trading volume and frequency and its related exit price at the market close on a specified date. Principal market identification for equities is a simple task: Identify on which exchange the ticker trades.

In contrast, crypto markets and identical crypto assets can trade on hundreds of markets that never close, have different tickers on each trading venue, and can exhibit trading volume and frequency that is dynamic. Further, while the world’s major stock exchanges are considered reliable and well-governed, the same can’t be said for the majority of crypto marketplaces.

These crypto-specific valuation considerations mean that expert knowledge and tools are crucial to the implementation of the fair value requirements.

Standardized and reliably sourced trading data from high-quality markets is necessary, as is a robust, independent principal market and exit price identification that can readily handle the dynamic nature of this setting. Audit trails and documentation are also key tools for supporting management judgment and principles-based accounting.

The Alternative Investment Management Association recently updated its investments valuation guide to include sections on crypto assets, and on choosing third-party pricing sources. The good news is that necessary expertise and technology exists and sits squarely within their sound practices.

Increasing Transparency, Trust

The fair value and reporting standard for crypto is noteworthy on many accounts, including FASB’s speed at tackling new reporting for a new industry. And it did so without compromising the most important aspect of standard-setting: rigorous due process. This facilitates transparency and trust in the standards themselves, and it encourages these traits within a growing industry.

The standard-setting due process involves public dissemination of research and outreach findings, public deliberation, public voting, and future public post-implementation reviews. The word “public” is key.

The role of transparency to the public in standard-setting is perhaps one of the least appreciated parts of developing robust and trusted reporting. It brings all stakeholders along on the journey, maximizing input from those affected and minimizing surprises. It also shows how closely FASB listens to stakeholders.

Non-authoritative guidance can help when there are temporary gaps in standards or implementation. But it shouldn’t permanently replace the rigors and transparency of authoritative standard-setting.

The former can surprise the market and create de facto authoritative guidance without due process. In its final report to the Securities and Exchange Commission in 2008, the Advisory Committee on Improvements to Financial Reporting noted that non-authoritative guidance can lean toward bright-line rules, even when standards don’t require them.

Principles Versus Rules

FASB clearly laid out the role of management judgment in its new standard. It also reaffirmed the existing standard for estimating fair value of crypto assets—a standard known for its principles-based versus bright-line rules approach.

Reliance on principles and use of management judgment can also be underappreciated concepts. The challenge for those applying both in financial reporting isn’t usually the standards themselves; it’s the auditors or regulators who become uncomfortable with variation in reporting, mistaking comparability and consistency for uniformity.

As a former analyst, I understand the reflex that wishes everything were identical across entities, as if that would make analysis better. But most analysts would prefer to hear each management’s story, with whatever variation that brings, as long as it’s not misleading.

The question is whether auditors and regulators will allow management to truly exercise their judgment in all the places that the existing and new US GAAP recommends. If so, crypto accounting experts and their tools must be compatible with the permitted variation that will follow.

Remaining Issues

The recent standard is a major achievement. However, additional crypto accounting topics will become important to address.

Two areas immediately stand out. First, reconsider whether virtually all crypto assets should be classified as indefinite life intangible assets. In financial reporting, a piece of wood isn’t classified as solely one type of asset within a singular standard. It can sit on the shelf at Home Depot as inventory, be part of a building, or be a dollar bill. Crypto isn’t one ‘thing’ either, and the accounting should better reflect that.

Second, create a project for FASB’s 2024 agenda for its Emerging Issues Task Force to address the accounting issues raised in the SEC’s surprise Staff Accounting Bulletin 121. SAB 121 conveyed interpretations of existing US GAAP that surprised experts and the marketplace; there were no public exchanges or deliberations.

Trust and transparency would be best served by using the FASB to define authoritative interpretations or standards for the matters of concern. The prescient 2008 ACIFR final report included Recommendation 2.5: “As a general matter, the SEC staff should refrain from issuing broadly applicable interpretive implementation guidance that would change U.S. GAAP and instead should refer such matters to the FASB.”

By bringing the marketplace along on the journey to new authoritative guidance without surprises, the necessary tools and resources are ready, further enhancing much-needed trust and transparency in crypto reporting.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Suzanne Morsfield is global head of accounting solutions for Lukka and has over 20 years of corporate reporting, standard-setting, audit, and analysis experience.

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