What’s Changing for Crypto Asset Reporting?

Accounting standards may be changing for crypto assets as early as later this year. The Financial Accounting Standards Board (FASB) issued a proposed accounting standards update (ASU) on March 23, 2023 after receiving feedback calling for crypto asset accounting to be prioritized. The goal of the proposed changes is to improve accounting and disclosure for certain crypto assets. The change will provide financial statement users with improved transparency about crypto asset holdings and more information on the potential risks. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

Current Treatment of Crypto Assets

Currently, crypto assets are treated as indefinite-lived intangible assets. There isn’t an end to their “useful life,” so they aren’t subject to amortization. This is like assets such as patents, copyrights, trademarks, and franchises.

In place of amortization, indefinite-lived intangible assets are tested for impairment. The record on the balance sheet is measured against the open market value of the asset. An asset is considered impaired if what’s recorded on the balance sheet (carrying amount) exceeds the fair value. A company would record an impairment loss and subsequently reduce the carrying amount to the fair value. Reversing an impairment loss or increasing an asset’s carrying amount is not allowed until an impaired asset is sold or disposed of.

While this treatment may work well for other indefinite-lived intangible assets, many have taken issue with this because the process doesn’t properly reflect the economics of crypto assets. Also, because of the volatile and ever-changing nature of cryptocurrency, using the lowest observable fair value during a period can make recognizing impairments difficult.

Assessing Crypto Assets at Fair Value

FASB’s proposed changes would still mean cryptocurrency assets will be treated as indefinite-lived intangible assets. However, the biggest changes will be to assessments, measurements, and disclosures.

During each reported period, the proposed ASU would mean that entities would be required to assess crypto assets at fair value on the statement of financial position. When the fair value changes, this would be recognized in net income. Cryptocurrency assets will also have to be recorded separate from other indefinite-lived intangible assets.

Disclosure Requirement Changes

Organizations would also need to improve the disclosure process at both annual and interim reporting periods. By improving disclosures, FASB believes investors will be able to evaluate the exposure and risk associated with cryptocurrency asset holdings more accurately.

Reporting on major holdings would include the following information:

• Name
• Cost
• Fair Value
• Number of units

Annually, entities will need to report on what was added, sold, as well as profits and losses from cryptocurrency holdings. Companies would also need to disclose information on crypto assets that aren’t major holdings – the cost of assets and the fair value of all non-major holdings.

Tax Treatment of Crypto Assets

While FASB is working on proposed accounting changes for cryptocurrency assets, there has not yet been a proposal to change the tax treatment. With the IRS, cryptocurrency is treated as property. Unrealized gains or losses are not recognized, meaning that financial records look different from tax records – a difference in book vs. tax.

Changes to disclosures on the accounting side may also lead to changes in tax law compliance enforcement and further updates.

Preparing for Change

The objective behind FASB’s proposed changes to accounting standards is to make the reporting process easier while better outlining the risks and exposures. However, assessing the fair market value and disclosing the proper information can still be complicated, especially for entities that hold several types of crypto assets. A company will need strong internal controls and potentially outside expertise if all proposed changes take effect.

Contact Us

The comment period on the proposed regulations closed earlier this month and it is expected that final regulations will be issued later this year. While it’s unclear whether any substantial changes will be made, it is important for companies to become familiar with the new regulations when published. If you have questions about the information outlined above or need assistance with a tax or reporting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.