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Crypto Industry to Get Official Rules on Bitcoin Accounting (1)

May 11, 2022, 2:09 PMUpdated: May 11, 2022, 3:13 PM

Companies like MicroStrategy Inc., Tesla Inc., and Block Inc. will get long-awaited rules for accounting for the stashes of Bitcoin and other digital assets they hold on their balance sheets, U.S. accounting rulemakers said Wednesday.

The Financial Accounting Standards Board unanimously agreed to kick off discussions on how to recognize and measure digital assets, as well as how to present them on company financial statements. The board rejected an idea to also consider whether commodities should be treated similarly to digital assets.

The board will have to decide how exactly to account for digital assets and whether the model should be optional or mandatory. Most board members on Wednesday didn’t support an optional set of rules. Crypto backers have asked FASB to consider measuring the volatile assets at fair value, an accounting method that aims to capture an asset’s true value at a certain point in time.

For companies that invest in digital assets, that could mean big swings in the earnings they report. Bitcoin has plunged from highs of more than $67,000 in November to briefly dipping below $30,000 this week.

“With highly volatile assets, fair value is a very unforgiving model,” FASB Chair Richard Jones said.

FASB will also have to set parameters around what exactly it means by digital assets, which run the gamut from Bitcoin to non-fungible tokens, or NFTs.

“It’s going to be very important that we narrow that scope dramatically,” Jones said. “There’s an awful lot of things that are digital assets today, because everything is digital.”

No part of the rulebook for U.S. accounting spells out how to account for digital assets. Companies follow nonbinding guidance from the American Institute of CPAs that calls for businesses that don’t qualify as investment companies to account for crypto as intangible assets, as prescribed under ASC 350.

This means companies record digital assets on their balance sheets at historical cost, minus drops in value during the period. The upshot is that companies only get to record price dips, never recoveries if the value rebounds. For volatile digital assets, it almost always means companies have to record impairments.

In one high-profile example of how companies viewed the rules as counterintuitive, enterprise software maker MicroStrategy, touted supplementary information to investors on what its earnings would be minus impairments. The Securities and Exchange Commission said that such unofficial results were not within the bounds of U.S. rules on non-GAAP measures, or measures that don’t comply with U.S. generally accepted accounting principles, and told the company to stop using them.

Wednesday marked the fourth time in five years that FASB has debated whether to tackle accounting for digital assets. When an industry group in 2017 first asked it to come up with such accounting rules, some companies were accepting cryptocurrency as payments from customers, but few invested in Bitcoin. FASB rejected two more subsequent requests.

The conversation changed when MicroStrategy made investing in crypto one of its central business models and when Tesla purchased $1.5 billion of Bitcoin.

Regulators’ attitude toward crypto accounting have also changed. When FASB in 2020 rejected a call to tackle accounting for digital assets, the U.S. Securities and Exchange Commission had “significant reservations” about the board creating an exception to U.S. accounting or an alternative accounting model for crypto, FASB Vice Chair James Kroeker said.

“Those views have probably evolved from the last point in time at which we talked about this as well,” Kroeker said.

The SEC staff in late March issued guidance that crypto trading platforms and companies safeguarding customer digital assets should report both an obligation and a corresponding asset for these holdings.

Still, the industry shouldn’t expect accounting changes overnight. FASB will have to perform research, debate plans in public, draw up a proposal, and release it for public input before finalizing any plans.

(Updates throughout with more details and comments from board members. )

To contact the reporter on this story: Nicola M. White in Washington at nwhite@bloombergtax.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergindustry.com; David Jolly at djolly@bloombergindustry.com