Industry Weighs in as Crypto Asset Reporting Proposal Hits Final Stretch

As the comment period for the proposed changes by the Financial Accounting Standards Board (FASB) regarding crypto asset reporting nears its end, companies supporting these updates are still requesting further guidance.

Crypto exchange Kraken expects to see additional guidance related to stablecoins, wrapped tokens and NFTs, for example, while accounting giant Ernst and Young and bankrupt crypto lender BlockFi seek revisions.

Grayscale Investments called the current scope of the proposal “understandable and operable” in a Monday letter, but added that “further identification of types of crypto assets may be required for accurate reporting.” 

A look at the proposed amendments

Crypto assets, under current Generally Accepted Accounting Principles (GAAP), are considered “indefinite-lived intangible assets” that are tested for impairment — defined as a permanent drop in an asset’s value.

If the carrying amount of the asset exceeds its fair value, an entity is required to recognize an impairment loss and reduce the carrying amount of the asset to its fair value. 

But amendments proposed by FASB would instead require entities to periodically measure certain crypto assets at fair value and recognize any fair value changes in net income, according to a draft of the changes published in March.

The proposed changes would also bolster disclosure requirements to “provide investors with relevant information to analyze and assess the exposure and risk of significant individual crypto asset holdings,” according to FASB.

The comment period for the proposals was set to end Tuesday. 

Proponents say the new standards would enable balance sheets to better reflect the true market value of the digital assets and could encourage institutions to hold them. 

MicroStrategy said in a letter to FASB last month that though it purchased its stack of 140,000 BTC for approximately $4.2 billion, the company currently reports the assets on its balance sheet at $2 billion.  

“This rule change will both provide clarity, and remove some of the barriers that previously kept some potential holders of BTC from carrying BTC on their balance sheets as part of their treasury management programs,” Fred Thiel, CEO of bitcoin miner Marathon Digital, told Blockworks in an email.

Ben Gaffey, controller at Valkyrie Investments, said the Accounting Standards Update (ASU) would spur entities to revisit whether crypto on the balance sheet is a viable strategy. However, he argued that the ability to apply the new guidance would not drive such discussions.

“It’s not a question of whether the crypto asset guidance will be established as [ASU], but whether the scope of the ASU will cast a wide enough net to satisfy entities which go further than bitcoin or ether,” Gaffey told Blockworks. 

A call for additional guidance

A few days after business intelligence firm MicroStrategy expressed support for FASB’s amendments, Kraken wrote in a May 25 letter that it considers the proposed guidance “the first in a phased approach to address accounting for digital assets.”

It noted an “urgent need” for additional guidance related to stablecoins, wrapped tokens and NFTs.

Ernst and Young (EY) said in a June 1 letter that language should be revised to ensure the proposed guidance applies to certain wrapped tokens — a tokenized version of a particular asset that is operable on another blockchain.

“The use of certain wrapped tokens has become common in practice, resulting in the availability of quoted prices for them in active markets,” it states. “We believe the proposal should apply to a wrapped token that only grants the holder the same rights as holding an underlying asset that otherwise would be in the scope of the proposal.”

BlockFi, which filed for bankruptcy last November, also submitted a letter on the proposed changes last week. The company notes it requested a “fair value” model as early as August 2021 in meetings with FASB.

“Change is not easy but in this case it is absolutely necessary,” BlockFi wrote in the letter. 

BlockFi requested more clarity around the proposal’s scope, calling it unclear as written. The FASB proposal currently would apply to crypto assets that “do not provide the asset holder with enforceable rights to, or claims on, underlying goods, services or other assets.”

Certain users could broadly interpret “enforceable rights” as any benefit inherent within the token’s specific protocol. These benefits may include rights to staking revenues or airdrops associated with a certain asset.

“This interpretation could eliminate a large portion of digital asset tokens from consideration and undermine the core purpose of this standard,” BlockFi wrote.

Grayscale Investments agreed in a Monday letter that the definition of “enforceable rights” might require additional analysis. 

“In addition, questions may arise around the treatment of crypto assets locked up in a smart contract protocol or other [DeFi] protocol,” Grayscale wrote, adding that the company believes  such assets should be included in the proposal’s scope.

A FASB spokesperson told Blockworks that FASB staff are set to analyze and summarize all the comments and present them to its board at a future public meeting. The board would then decide to approve a final standard or make changes.   

Gaffey said he expects explicit accounting guidance for crypto assets to be finalized by the end of the year.

“Although no expected effective date was included in the draft, the building pressure from the industry over the past few years as crypto assets are adopted by more institutional investors would suggest early adoption — allowing entities to immediately apply the new rules — will be permissible,” he said.

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