USA Adopts Fair Value Accounting for Bitcoin

The U.S. Financial Accounting Standards Board (FASB) has officially adopted Fair Value Accounting for Bitcoin for fiscal years beginning after December 15, 2024. The shift will trigger major swings in value and will benefit companies with crypto on their balance sheets. As Canadians on the forefront of digital asset accounting and taxation, we urge CPA Canada to follow suit. New standards are required to allow stakeholders of all backgrounds to be able to better understand and use financial statements. Let’s look at the details.

The Details

On December 13, 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-08 which addresses the accounting and disclosure requirements for certain crypto assets. The new guidance requires entities to measure certain crypto assets at fair value, with changes in fair value recorded in net income in each reporting period.ASU 2020-08 requires entities with crypto asset holdings to:

  • Present on the balance sheet the aggregate amount of “crypto assets measured at fair value separately from other intangible assets” that are not measured at fair value.
  • Include in net income changes in the fair value of crypto assets separately from changes in the carrying amount (e.g., impairments and amortization) of other intangible assets, including other digital assets that are not measured at fair value.
  • Classify as cash flows from operating activities those cash receipts from the nearly immediate sale of crypto assets that were “received as noncash consideration in the ordinary course of business (for example, in exchange for goods and services transferred to a customer).”

For all entities, the ASU’s amendments are effective for fiscal years beginning after December 15, 2024, including interim periods within those years. Early adoption is permitted. If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period.

The Background:

Before ASU 2023-08, FASB standards required companies to report a loss if the crypto they hold is worth less than the purchase price, even if they haven't sold the asset. Specifically, a crypto asset was required to be valued at its lowest observable fair value within a reporting period. No write-ups for fair value were allowed within this reporting regime.

FASB received approximately 500 letters from the digital asset community who raised concerns that, among other factors, this intangible asset model (1) did not faithfully represent the economics of crypto assets and (2) made the recognition of impairments needlessly complex by requiring entities to use a crypto asset’s lowest observable fair value within a reporting period.

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 Non-fungible, wrapped and created tokens are not captured in the scope of this guidance questions will remain about how entities should account for and disclose other types of digital assets.

The FASB Board anticipates that the guidance in the ASU will better reflect the economics of certain crypto assets held by entities as well as reduce the complexity and cost of complying with a historical-cost-less-impairment model under the existing requirements in ASC 350.

The Board also 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).

The Implications:

The shift will trigger major swings in value and will benefit companies with crypto on their balance sheets. Bitcoin's price rose more than 1% after the guidance was released and it continues to rise as regulators signal to markets that BTC is to be taken seriously.

Michael Saylor, MicroStrategy's founder and former CEO, tweeted: “FASB has officially adopted Fair Value Accounting for #Bitcoin for fiscal years beginning after Dec 15, 2024. This upgrade to accounting standards will facilitate the adoption of $BTC as a treasury reserve asset by corporations worldwide.”

Consider MicroStrategy (MSTR) as a case in point. In Q3 2023, the company possessed 158,400 bitcoins, acquired at an average historical price of $29,609 per bitcoin. With that said, under the previous FASB requirements, these holdings were reported at a impaired value of only $15,476 per bitcoin on average on their balance sheet. This depiction, however, falls short of capturing the true fair market value of $26,969 per bitcoin, a substantially higher figure that more faithfully represents the inherent value of the underlying assets being held by MSTR.

With the new FASB requirements, MicroStrategy will be required to write their bitcoin up/down to fair market value, allowing for investors and the public alike to get a better representation of the companies holdings. Additionally, these changes in the valuation of digital assets on the balance sheet will occur regularly and will flow through the income statement, again, better reflecting the company's position. These charts examine the changes in the balance sheet and retained earnings as a result of this change:

Comparison of Recorded, FMV and Historical Digital Asset Values
Difference in holding value of BTC as a result of FASB changes
Difference in Retained Earnings as a result of FASB changes
FASB Chair Richard R Jones stated: “The new standard responds to feedback from stakeholders of all backgrounds who indicated that improving the accounting for and disclosure of crypto assets should be a top priority for the Board. It will provide investors and other capital allocators with more relevant information that better reflects the underlying economics of certain crypto assets and an entity’s financial position while reducing cost and complexity associated with applying current accounting.”

In our recent feedback publication to CPA Canada, we argue that a change like this is essential to inform and protect the Canadian public and to foster digital asset companies in Canada. If you are interested in this topic, we invite you to join us in writing to CPA Canada advocating for regulation in the digital asset space.

Digital Asset Markets will evolve as regulations and standards mature. If you are holding, trading or creating in the digital asset space, our industry-leading team can help.

Disclaimer: This commentary is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice, nor does it constitute solicitation to buy or sell any securities referred to. Any tax information published on this blog is based on the facts provided to us and on current tax law (including judicial and administrative interpretation) during the time of publication. Tax law can change (at times on a retroactive basis) and these changes may result in additional taxes, interest, or penalties. Practice due diligence and if in doubt, speak with a member of our team.

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