SEC Withdraws Controversial SAB 121, Shifts Crypto Accounting Guidance

  • The controversial SAB 121, requiring crypto custodians to mark assets to fair value each period, has been rescinded.
  • It’s replaced by SAB 122, which directs firms to adhere to established FASB or IAS accounting standards.
  • Implementation of this change is mandatory by December 2024 but firms can choose to apply it sooner.
  • SEC reminds firms to disclose how changes affect their accounting and to continue clear reporting on safeguarding crypto-assets.

A widely disliked accounting rule has finally received its marching orders: the controversial SAB 121 is being axed.

SEC Commissioner Hester Peirce made the announcement on Crypto Twitter, much to the liking of the community, with the CEO of Mara Holding being one of the first to express his gratitude:

Source: X

The original SAB 121 required crypto custodians to record both a liability and a corresponding asset for crypto-assets held on behalf of customers, marking them to fair value each reporting period, irrespective of who controls a crypto-asset.

This was a significant departure from previous practices, which relied on more nuanced judgments about asset control and custodial arrangements.

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SAB 121 is replaced by SAB 122 which directs firms to use established Financial Accounting Standards Board or International Accounting Standard rules.

Under the new bulletin, entities with obligations to safeguard crypto-assets must now evaluate whether to recognise a liability for the risk of loss under these obligations.

Decision Based on Whether GAAP or IFRS Applies

They should do this by applying the recognition and measurement criteria for liabilities related to contingencies as outlined in the Financial Accounting Standards Board Accounting Standards Codification (FASB ASC) Subtopic 450-20, “Loss Contingencies”, or International Accounting Standard (IAS) 37, “Provisions, Contingent Liabilities and Contingent Assets”.

This depends on whether firms adhere to US generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS).

The SEC specifies that entities should implement this change fully retrospectively in annual periods beginning after December 15, 2024. Although the bulletin gives wiggle room here:

Entities may elect to effect the rescission in any earlier interim or annual financial statement period included in filings with the Commission after the effective date of this SAB.

SEC Accounting Bulletin 122

There is also a requirement to provide clear disclosure of the effects of this change in accounting principle at the initial application.

Additionally, the SEC reminds entities of their ongoing obligation to provide disclosures that help investors understand the entity’s responsibilities “to safeguard crypto-assets held for others”.

Aaron Feuerstein
Author

Aaron Feuerstein

Aaron Feuerstein is a freelance writer based in Melbourne. His focus is on decentralised finance and the regulatory space surrounding blockchain. He holds a Master's in Accounting. When he is not studying the latest legal case, he enjoys his time as a modest but eager hobby cook.

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