Understanding the FASB Crypto Accounting Landscape
Accountants, corporate management, and investors are all seeking better guidance for the accounting, valuation, disclosure, and reporting of crypto assets. FASB recognized this need and issued an exposure draft in March 2023, titled “Intangibles—Goodwill and Other-Crypto Assets,” to address the issues in crypto asset reporting. This article delves into the potential implications of this exposure draft and examines the reporting practices of three entities heavily involved in the crypto market: Grayscale Bitcoin Trust, MicroStrategy Inc., and Coinbase Global Inc. The original and full article can be found here
The Crypto Reporting Conundrum
One major issue is the lack of clarity in defining crypto assets as securities or commodities. This lack of clarity results in non-uniform and inconsistent reporting. While FASB’s exposure draft is still a work in progress, it provides insight into the possible direction of changes in the reporting of crypto assets. In the meantime, U.S. accountants must audit companies with substantial exposure to crypto under current Generally Accepted Accounting Principles (GAAP).
Challenges in Auditing Crypto Assets
The article highlights the limitations that Certified Public Accountants (CPAs) encounter when auditing crypto assets, especially in the context of virtual currency financial reporting and disclosures. It reviews the financial statements of Grayscale Bitcoin Trust, MicroStrategy Inc., and Coinbase Global Inc., emphasizing the challenges and uncertainties in crypto accounting.
Regulatory Warnings and Lawsuits
The U.S. Securities and Exchange Commission (SEC) issued a stern warning about the inherent risks in cryptocurrency investments in March 2023, citing issues like volatility, inadequate financial reporting, and lack of useful information. The SEC also filed lawsuits against major crypto trading platforms like Binance and Coinbase, emphasizing regulatory uncertainty.
FASB’s Proposed Solutions
FASB’s exposure draft aims to address these issues by enhancing the quality of financial information related to crypto assets. It introduces six specific criteria for crypto assets to meet and suggests changes in GAAP related to measurement, presentation, and disclosure.
Enhancing Transparency and Disclosure
One notable change proposed in the exposure draft is the recognition of fair market value (FMV) changes in each reporting period, rather than waiting until the asset is sold. This change is intended to provide a more accurate reflection of the asset’s value and financial position. The exposure draft also calls for detailed disclosures, including the name of the crypto asset, its cost basis, fair value at the reporting date, and the number of units held. This additional transparency aims to enhance the decision usefulness of financial reports and the auditability of crypto assets.
Feedback and Concerns from Comment Letters
The article further discusses the feedback from comment letters received by FASB, with general support among public accounting firms for the exposure draft’s framework. However, concerns were raised regarding the treatment of cumulative unrealized gains and losses related to crypto assets held by reporting entities. Additional suggestions for crypto disclosures were rejected, such as providing more information about gains and losses, pricing, and cryptographic details. The rejection was based on the belief that existing and proposed disclosures already cover some of this information, while other suggested disclosures were deemed too detailed.
Pricing Challenges and Risks in the Crypto Market
The article also addresses concerns about the accuracy of crypto pricing, with reports indicating that a significant portion of trading volume may be unreliable or fraudulent. This raises questions about the credibility of reported values for cryptocurrencies. The lack of clarity in crypto pricing, along with issues like private key security, peer-to-peer networks, and the use of third-party services, presents significant risks in the crypto market. These risks are highlighted in the financial statements and management write-ups of the reviewed entities.
The Way Forward in Crypto Accounting
The article concludes by emphasizing the challenges in auditing crypto assets under current accounting standards. It questions why CPA firms are willing to subject themselves to reputational and legal risks in this complex and rapidly evolving field. It also notes that the exposure draft is a positive step toward addressing the challenges in the crypto market, but it remains to be seen how effectively it will resolve these issues.
