On December 13, 2023, FASB issued Accounting Standards Update (ASU) 2023-08 with narrowly focused accounting and disclosure guidance for certain crypto assets. Early adoption is permitted upon issuance in interim or annual financial statements.
Scope
ASU 2023-08 will apply to all entities, including public business entities, private companies, nonprofits (NFPs), and employee benefit plans holding assets meeting the scope criteria below.
Covered crypto assets must meet the following criteria:
- Meet the intangible asset definition in the Codification Master Glossary. The intangible asset definition specifically excludes financial assets. Fiat currencies and many other securities1 are therefore excluded and should be accounted for under other GAAP.
- Do not provide the asset holder with enforceable rights to—or claims on—underlying goods, services, or other assets. This evaluation will require management judgment. The ASU and basis of conclusion are silent on whether a legal opinion is needed. The basis does note that contracts with customers, guarantees, and insurance contracts (even if in digital form) continue to be covered by other GAAP.
- Are created or reside on a distributed ledger or blockchain or similar technology. This is intended to scope out other digital intangible assets such as software and media.
- Are secured through cryptography.
- Are fungible. This excludes nonfungible tokens (NFTs) from scope.
- Are not created or issued by the reporting entity or its related parties. An entity that mines or validates and receives newly created crypto assets is not the creator of the crypto assets received as consideration for performing services if that is the only involvement that an entity has in the creation of the crypto asset.
Investment Companies
Although industry-specific guidance, such as guidance for investment companies, currently permits or requires accounting for crypto assets at fair value, FASB decided that it would be beneficial to include those entities within the scope of ASU 2023-08 because investors would benefit from enhanced disclosures. Subtopic 946-205, Financial Services—Investment Companies—Presentation of Financial Statements, requires presentation of a statement of net assets, which includes a schedule detailing an entity’s investments on a more disaggregated basis, and provides guidance on the presentation of changes in the fair value of investments in an investment company’s statement of operations. FASB concluded that investment companies should continue to present amounts related to crypto assets in their financial statements in accordance with Accounting Standards Codification (ASC) 946.
Measurement & Presentation
Under ASU 2023-08, covered crypto assets would be measured at fair value under ASC 820, Fair Value Measurement, with any changes in fair value reported in net income each reporting period. The ASU does not provide a measurement alternative for crypto assets without quoted prices in active markets. In a change from the proposal, the final ASU is silent on the treatment of costs incurred to acquire crypto assets.
Crypto assets should be presented separately from other intangible assets on the balance sheet. An entity can—but is not required to—present crypto assets on a more disaggregated basis, i.e., by individual crypto asset holding or intangible asset class. Gains and losses from remeasuring crypto assets would be reported in net income separately from the changes in the carrying amounts of other intangible assets, such as amortization or impairments. Crypto assets received as noncash consideration during the ordinary course of business that are converted “nearly immediately” into cash would be classified as operating cash flows. For this ASU, the term “nearly immediately” refers to a short period of time that is expected to be within hours or a few days, rather than weeks. ASC 958 also was amended so that an NFP that nearly immediately liquidates crypto assets received with donor-imposed restrictions for long-term or capital use classifies the cash inflows as financing, which is consistent with the required classification of donated financial assets with those donor-imposed restrictions.
Disclosures
For annual and interim reporting periods, an entity is required to disclose the following information:
- The name, cost basis, fair value, and number of units for each significant crypto asset holding and the aggregate fair values and cost bases of the crypto asset holdings that are not individually significant
- Restrictions. The following information is required for crypto assets subject to contractual sale restriction(s):
- The fair value of those crypto assets
- The nature and remaining duration of the restriction(s)
- The circumstances that could cause the restriction(s) to lapse
- An entity with multiple crypto assets subject to contractual sale restrictions shall consider all of the following:
- The level of detail necessary to satisfy the required disclosures
- How much emphasis to place on each of the required disclosures
- How much aggregation or disaggregation to undertake
- If financial statement users need additional information to evaluate the quantitative information disclosed
For annual reporting periods, an entity is required to disclose the following information:
- A rollforward/reconciliation of activity in the reporting period for crypto asset holdings, including:
- Additions including a description of the activities, e.g., purchases, receipts from customers, or mining.
- Dispositions including a description, e.g., sales or payment for services.
- Gains included in net income for the period, determined on a crypto-asset-by-crypto-asset basis. Each crypto asset holding that has a net gain from remeasurement as included in net income for the period must be included in the gains line.
- Losses included in net income for the period, determined on a crypto-asset-by-crypto-asset basis. Each crypto asset holding that has a net loss from remeasurement as included in net income for the period must be included in the losses line.
- For any crypto dispositions in the reporting period, the difference between the sale price and the cost basis and a description of the activities that resulted in the dispositions. If gains and losses are not presented separately, the entity is required to disclose the income statement line item in which those gains and losses are recognized
- The method for determining the cost basis of crypto assets, e.g., first-in, first-out; specific identification; average cost; or other method
An entity that receives crypto assets as noncash consideration in the ordinary course of business or as NFP contributions that are converted nearly immediately into cash is not subject to the rollforward requirements above.
Effective Date & Transition
ASU 2023-08 is effective for all entities for fiscal years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted for both interim and annual financial statements that have not yet been issued (or made available for issuance). If an entity adopts in an interim period, it must adopt the content as of the beginning of the fiscal year that includes that interim period.
An entity would recognize the cumulative effect of initial application as an adjustment to the opening retained earnings (or other appropriate components of equity or net assets in the statement of financial position) as of the beginning of the annual reporting period of initial adoption.
The adjustment to opening retained earnings would be calculated as the difference between the carrying amount of crypto assets as of the end of the prior annual reporting period and the fair value of those crypto assets as of the beginning of the annual reporting period of initial adoption.
Conclusion
Forvis Mazars will continue to follow crypto asset tax, regulatory, and accounting developments.
- 1 Assets considered as securities for regulatory purposes may not be securities as defined in the Master Glossary.