Crypto Accounting Plan Would Have Net Income Reflect Value Swings

Companies like MicroStrategy Inc., Tesla Inc., and Block Inc. that stash bitcoin in company coffers would have to highlight their holdings in separate balance sheet line items and record swings in value as hits or boosts to net income, under a plan taking shape from US accounting rulemakers.

The aim is to give readers of financial statements maximum transparency into how the market value of cryptocurrencies affects businesses’ bottom lines, unanimous Financial Accounting Standards Board members said Wednesday.

“There were some concerns expressed by a handful of people about volatility in the income statement, but that volatility reflects real exposure to economic volatility,” FASB member Christine Botosan said. “So it’s really important for that to go through the income statement.”

The votes put FASB on track to release a proposal for public comment by mid 2023. The proposal would apply to both public and private companies, the board said

FASB members in October took a key step toward developing new accounting rules for digital assets by voting to require companies to measure cryptocurrencies at fair value, a measurement technique that captures the most current value of an asset or liability. The board had not, however, voted on where in the financial statement companies would record the fluctuating value of crypto—whether it should be in net income or other comprehensive income.

Under the plan so far, companies like enterprise software maker MicroStrategy that bet big on bitcoin could see wild swings in earnings depending on the market value of the cryptocurrency.

FASB on Wednesday also laid out specific information companies would have to report in their footnotes about their crypto holdings at the end of each period: the name of the crypto assets, their cost basis, their fair value, the quantity of each significant crypto asset that they hold, and a description of how they determined the value of the crypto.

MicroStrategy, which went all-in on purchasing bitcoin in 2021 as a core business strategy, voluntarily includes a bevy of disclosures about its holdings in its financial statement footnotes. Other companies, such as electric vehicle manufacturer Tesla, however, offer few details about their holdings, opening up financial reporting questions when the company sold 75% of its crypto in July.

The disclosure disparity follows from the fact that no US accounting rules spell out how companies should recognize and measure their digital assets. Guidance from the American Institute of CPAs calls for businesses that don’t meet the definition of investment companies to treat them as intangible assets.

The accounting treatment means companies that invest in bitcoin report cryptoassets at the prices they paid and mark them down permanently if their value decreases during a period. Cryptocurrency fluctuations often result in companies slashing the value of their holdings; they only get to record gains if they sell them at a profit.

Companies and accountants have complained for years about the lack of official accounting rules, but FASB rejected three official requests, initially arguing that not enough companies used crypto in any material way to justify the time and resources needed for making new rules. The board changed its tune in 2021, when it received hundreds of requests to take action.

“Whether you think it’s the future of finance or whether you think it’s a speculative bubble in the process of popping, I think moving to fair value really does allow investors more useful information. That’s critical,” FASB member Frederick Cannon said.

FASB will reconvene in early 2023 to discuss whether it needs to include issuers of crypto tokens as part of the potential guidance, any other lingering issues, and how long the proposal should go out for comment, a FASB staff member said.