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Changes in US Accounting Rules for Companies Holding Crypto: What Australian Investors Should Know
The authority for setting accounting rules in the United States, the Financial Accounting Standards Board (FASB), has voted on a long-awaited crypto-specific accounting rule. Under the new rule companies must use the fair value approach for a defined group of digital assets, rather than recognising unrealised losses. The current practice, which was widely seen as holding back crypto adoption, required companies to record crypto assets at their lowest value, preventing them from recording gains.
The new rule means that both, public and private companies need to use the fair value method. The FASB met on Wednesday to evaluate industry comments and gave the green light for a final draft version of the new standard, which will come into effect on December 15, 2024. While the new rules are expected to gain formal approval later this year, companies are encouraged to adopt the standard earlier.
Fair Value and Crypto
The FASB defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).”
Fair value is considered a better way to measure cryptocurrency holdings, as it looks at current market conditions and various relevant factors that could affect the asset’s value. This approach reflects market realities and enhances transparency in financial reporting.
While the new rule means dips and price rallies must be included at the time of recording, resulting in more volatility in earnings, it is widely seen as an improvement.
Christine Botosan, a member of the FASB said, “It’s not very often that we can both take cost out of the system and improve the decision usefulness of information, and it makes it a really easy vote to do both of those.”
The FASB is governed by the US Securities and Exchange Commission (SEC) and mandates corporations situated in the United States to follow generally accepted accounting rules (GAAP). While Australia is among 120 nations that mandate International Financial Reporting Standards (IFRS) compliance, the United States do not.
The Australian Context
There are currently no specific IFRS rules for cryptocurrencies. In general terms, crypto held by companies for sale in the ordinary course of business is considered inventory under IFRS. However, the Australian accounting body, the AASB, has stated that a lack of guidance in IFRS means that digital assets, especially cryptocurrencies, could be inventory or intangible assets.
Intangible assets are non-physical assets such as copyright, trademarks, patents, goodwill, and software. The AASB has expressed its opinion that digital currencies should be measured at fair value, with changes recognized in profit or loss. The AASB recommends that the International Accounting Standards Board (IASB) develop a new standard for digital assets.
Overall, US GAAP is often considered to be more prescriptive and rules-based compared to IFRS, which tends to be more principles-based. This leaves less room for companies and accountants in the United States to interpret rules than their non-US counterparts have.
The new U.S. rule includes blockchain-based assets such as cryptocurrencies but excludes stablecoins and NFTs. The board has deferred a decision on wrapped tokens until later, pending the availability of more data.
What the Change Means for Investors
Fair value will make it easier for investors to assess a U.S. company’s financial position. The previous method often meant a distortion of the financial health of a company. CFO of MicroStrategy, Andrew Kang said in May that fair value reporting would “enable us to provide investors with a more relevant view of our financial position and the economic value of our bitcoin holdings, which in turn would facilitate the ability of investors to make informed investment and capital allocation decisions.”
Founder and former CEO of MicroStrategy Michael Saylor expressed his support for the decision in a post: “Fair value accounting is coming to Bitcoin. This upgrade to FASB accounting rules eliminates a major impediment to corporate adoption of BTC as a treasury asset.”
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.
