Interpreting the first version of the U.S. cryptocurrency accounting system: the spring of large coin holders?

Original | Odaily

Author | Jk

On Wednesday, December 13 local time in the United States, the Financial Accounting Standards Board (FASB) released the first accounting rules for cryptocurrencies. Companies will be required to calculate the value of their cryptocurrency holdings at fair value and record them in their published quarterly and annual financial reports. This new rule allows companies that hold cryptocurrencies to record the highs and lows of cryptocurrencies, thus potentially encouraging more companies to choose cryptocurrencies in their investment decisions.

What are FASB and accounting standards?

In simple terms, accounting standards are the accounting rules chosen to be used by U.S. companies (which are actually widely used in international listed companies) to establish a common standard for financial-related statistics. **The FASB (Financial Accounting Standards Board) is the body responsible for setting financial accounting and reporting standards in the United States. The accounting standards set by it have been widely used by public companies and many other types of businesses since the 70s. **These standards are referred to as Generally Accepted Accounting Principles (GAAP).

GAAP is a set of accounting principles, standards, and procedures for the preparation and reporting of financial information. These standards provide a common framework for accounting treatment and financial reporting, enabling investors, managers, financial analysts, and other stakeholders to effectively understand and compare the financial reports of different companies. In the simplest terms, these rules developed by the FASB determine a uniform financial reporting format and statistical methodology for listed companies. **

Prior to the release of the cryptocurrency accounting rules, companies that do not qualify as investment firms (such as TSL, whose main business is not asset management) have adopted the American Institute of Certified Public Accountants’ practice guidance by default, which treats cryptocurrencies as intangible assets, a category that includes assets such as trademarks, copyrights, and brands. Significantly different from cryptocurrencies, these assets are rarely traded.

This treatment means that the company records its tokens at the price they paid at the time of purchase and permanently writes them down when their price falls below the purchase price. However, when the value of cryptocurrencies rises, they are not able to record this part of the earnings report, and they can only record it when they sell their crypto holdings and realize this part of the gains. Obviously, this part of the accounting standard is not suitable for cryptocurrencies that are frequently traded. MicroStrategy, the publicly traded company with the largest BTC holdings, is often weighed down by this accounting practice, because BTC price appreciation cannot be recorded in the earnings report unless they choose to sell.

Now, companies can measure their holdings of tokens at fair value under this rule. Since changes in fair value will be recorded in net income, tokens can be accounted for in the financial report based on the latest market value, and the appreciation of the digital currency on the company’s balance sheet will be recorded in the company’s revenue without being sold. **

So, since 2017, the crypto industry has asked the FASB to make rules three times, but accounting rulemakers have not confirmed the implementation of the new rules until now.

Scope and timing

According to Bloomberg, the FASB deliberately narrowed the scope of the new accounting rules. **NFTs are excluded, and stablecoins and tokens created by issuers (such as FTT issued by the exchange FTX itself) are not subject to these new rules and therefore cannot be recorded in financial reports. Wrapped tokens that emerge through bridges, such as WBTC, are also not covered by the new rules. FASB members have stated that they are willing to deal with more cryptocurrency issues in the future if these issues become common in practice.

The new rules will come into force for both public and private companies for fiscal years beginning after December 15, 2024, which means 2025 for companies with a calendar year ending in the year. **Companies may choose to start following these rules before the deadline. In other words, in the midst of an upward cycle, we can see cryptocurrencies recorded by market value in this year’s earnings report at the earliest.

What is the impact of this new accounting standard?

The most immediate impact of this accounting standard on companies is that listed companies will be more likely to start investing in cryptocurrencies. According to the previous accounting standards, the price of a cryptocurrency after it has appreciated cannot be recorded in the financial report, but the price of the loss needs to be recorded, which is equivalent to the financial report only recording the bad news of the cryptocurrency investment and not the good news, which is not a good thing for the stock price that is closely related to the financial report. Now, companies will be more likely to add cryptocurrencies to their portfolios during an upcycle, and they will be able to record the appreciation of these assets in their earnings reports.

At the same time, investors will have a clearer picture of the cryptocurrency holdings of listed companies. Under the new rules, companies are required to make a separate entry for their crypto assets on their balance sheets. They must also disclose significant cryptocurrency holdings and any restrictions on those holdings in a footnote during each reporting period. In the annual report, they will have to coordinate or disclose changes in the opening and closing balances of their crypto assets, and they will need to be categorized by category.

How do crypto KOLs react?

Odaily previously reported that MicroStrategy founder Michael Saylor posted on the X platform that the upgrade of U.S. GAAP will promote the adoption of BTC as a reserve asset by global enterprises. David Marcus, former president of PayPal and former head of crypto at Meta, commented that this seemingly minor change in accounting standards is actually significant, removing a major barrier for companies to put BTC on their balance sheets. For BTC, 2024 will be a landmark year.

The Bloomberg report also wrote, “It’s fantastic to receive this gift of accounting at this time of year,” said Edward McGee, chief financial officer of Grayscale Investments.

PJ Theisen, a partner at Deloitte & Touche LLP, said that for some types of cryptocurrencies, fair value can be difficult to get correctly. “It sounds straightforward,” Theisen says. "One thing to keep in mind is that this can be challenging, especially for crypto assets, to actually determine what their fair value is. ”

Admittedly, there will be no shortage of objections in the market: “I think crypto is a bunch of pet stones,” Rep. Brad Sherman, a Democrat, said at a related hearing, “It’s not on the balance sheet.” ”