FASB proposes new cryptocurrency accounting standards - what does this mean?

summary

The past week has been busy in the cryptocurrency space: the Financial Accounting Standards Board (FASB) proposed new standards for crypto assets, while the U.S. Securities and Exchange Commission (SEC) issued a warning urging investors to be cautious about “crypto-asset securities.”

FASB, or the Financial Accounting Standards Board, is a non-profit organization that sets a set of accounting standards that are in the public interest for the United States. It was established in 1973 by the Securities and Exchange Commission and replaced the standards of the Board of Accounting Procedure and the Accounting Principles Board.

Key Points

The guidelines proposed by the FASB will treat crypto assets more like traditional assets and improve the accuracy of valuations. At the same time, the SEC appears to be strengthening its position that many crypto assets are securities and are high-risk investments.

in conclusion

Companies should hire experienced counsel to prepare for upcoming changes in accounting standards and for increased SEC enforcement actions in the cryptocurrency space.

This past week was a busy one on the cryptocurrency regulatory front, with new accounting standards for companies holding cryptocurrencies and the SEC continuing to crack down on cryptocurrencies, claiming there is a lot of fraud in the industry.

First, the Financial Accounting Standards Board (FASB) released a draft update to its accounting standards for cryptocurrencies, which are used to account for and disclose crypto assets. On the same day, the SEC’s Office of Investor Education and Advocacy issued an investor alert urging investors to be cautious when investing in “crypto-asset securities,” reflecting recent SEC enforcement actions and statements from SEC leadership that the industry is rife with fraud.

First, the FASB’s accounting update for crypto assets should help investors. Currently, generally accepted accounting principles (GAAP) require companies to include cryptocurrency holdings as “indefinite-lived intangible assets” on their balance sheets. Under current GAAP, crypto assets are reviewed for impairment annually and more frequently if events or circumstances indicate that the asset is more likely to be impaired. If the carrying amount of the asset exceeds its fair value, an impairment loss must be recognized and the carrying amount of the asset reduced to its fair value. Subsequent increases in carrying value and reversals of impairment losses are prohibited. In other words, companies holding cryptocurrencies can only report decreases in the value of their crypto assets and not increases until the crypto assets are sold in accordance with the rules for indefinite-lived intangible assets. The FASB’s cryptocurrency update is intended to change this reporting approach to improve the accuracy of companies’ financial statements. For annual and interim reporting periods, the FASB recommends that companies disclose the following information:

1. The name, cost, fair value, and amount of each significant cryptoasset held and the aggregate fair value and cost of cryptoasset holdings that are not individually significant.

2. For crypto-assets that are subject to contractual sales restrictions, the fair value of those crypto-assets, the nature and remaining term of the restrictions, and the circumstances that may lead to the termination of the restrictions.

For annual reporting periods, FASB recommends that companies provide the following additional information:

1. A summary of the overall activity of crypto-assets held during the reporting period, including additions (explaining the activity that led to the additions), sales, gains, and losses. If gains and losses are not presented separately, the entity must disclose the income statement items in which these gains and losses are recognized.

2. For any sale of crypto assets during the reporting period, the difference between the sale price and the cost and a description of the activities that led to the sale.

3. Methods for determining the cost of crypto assets.

FASB proposed these changes to “provide decision-making information to investors.” FASB believes these additional disclosures will provide “relevant information reflecting the underlying economic and financial condition of these assets.” In addition, this proposed measurement approach will align the accounting of all companies holding crypto assets with that of other entities with industry-specific guidance (e.g., investment companies) and eliminate the requirement to perform separate impairment tests on these assets, thereby reducing the costs and complexity associated with applying current guidance.

FASB will seek comments on the proposal until June 6.

SEC Identifies Risks of Crypto Assets

Following the recent enforcement actions by the SEC Enforcement Division, the SEC’s March 23rd warning reflects the SEC Chairman’s goal to ensure that crypto investors and crypto markets receive all the same protections as any other securities market. The SEC’s Office of Investor Education and Advocacy listed four reasons why it considers crypto assets to be high-risk investments:

1. Companies that offer crypto-asset investments or services may not comply with applicable laws, including federal securities laws;

2. Investing in crypto-asset securities is extremely risky and often highly volatile;

3. Alleged scammers continue to exploit the growing popularity of crypto assets to lure retail investors into participating in scams, often resulting in devastating losses;

4. Having an investment plan and understanding your risk tolerance and time horizon are critical to your investment success.

The most notable warning of the four is the first one - the SEC continues to claim that crypto asset companies have violated federal securities laws by failing to register with the SEC. In other words, the SEC continues to insist that many crypto assets are actually securities and should be subject to SEC regulation. Therefore, we expect to continue to see SEC enforcement actions for such violations.

in conclusion

Combined with the SEC's warning, the FASB's proposal suggests that U.S. cryptocurrency regulation may conflict with cryptocurrency companies. On the one hand, the FASB is proposing new standards that would treat cryptocurrencies held by companies as ordinary assets. On the other hand, the SEC continues to urge investors to be cautious about cryptocurrency assets. All of these developments are a reminder that cryptocurrency companies should hire legal counsel to help navigate this rapidly changing legal environment.

Original link:

https://www.ballardspahr.com/Insights/Alerts-and-Articles/2023/03/FASB-Proposes-New-Crypto-Accounting-Standards-SEC-Alert-Reinforces-Securities-Enforcement-Authority