The Financial Accounting Standards Board voted to add a project to its technical agenda to improve the accounting for and disclosure of certain digital assets, such as cryptocurrency.
During an online meeting Wednesday, FASB’s staff informed the members of the board that they had received hundreds of requests from stakeholders for guidance on accounting for digital assets in response to a recent consultation on items to add to its agenda. Of the 522 responses received from FASB’s constituents, 445 of them related to digital assets. It was the most frequently identified item by respondents.
FASB chair Richard Jones said last week during an accounting conference at Baruch College in New York that many of the respondents wanted digital assets to be accounted for at fair value (see story). FASB also discussed at this week’s meeting whether to add a project to its technical agenda to address the accounting for exchange-traded digital assets and commodities. While the board did add a project to its technical agenda to improve the accounting for and disclosure of certain digital assets, it decided against adding a project to address accounting for exchange-traded commodities to its technical agenda. However, Jones decided the topic would remain a project on FASB’s research agenda.
“I do support adding a project on digital assets to our agenda,” said FASB board member Christine Ann Botosan. “I do think that we should begin at least with looking at recognition, measurement, presentation and disclosure. I do continue to have some reservations about the use of the markets. In some cases the markets are just not as well developed when it comes to digital assets and are unregulated, so I do continue to have some concerns once you get past the main digital assets that we’re familiar with, like Bitcoin and so forth. But I think that’s an issue that we can try to figure out as we take the project on, and I think it will be up to auditors and preparers to figure out how the fair value model is appropriately applied in the context of the various digital assets that the companies hold.”
“I also support a project on recognition and measurement of digital assets, including presentation and disclosure, and at this point don’t think scoping in commodities makes sense,” said FASB board member Frederick Cannon.
The fast-changing world of crypto, where the market has been seeing considerable volatility lately, will demand a flexible approach to dealing with the market and whether the assets should be treated similarly as other commodities. “We have to recognize that this is rapidly evolving and we want to allow for some adaptability of accounting standards to that evolution,” said Cannon.
FASB vice chair James Kroeker noted the differences distinguishing crypto from other commodities such as minerals that could be made into finished goods, and thinks that some of the standards might be adapted from existing fair value and inventory guidance on agricultural goods. “After we address the accounting for crypto, I certainly would be open to a project that then also addresses commodities, and I wonder if we can do that through just loosening some of the restrictive language in the inventory accounting model,” he said.
Other FASB members put the commodity question on the back burner. “As it relates to commodities, I believe there is a problem to solve here, but I wouldn’t necessarily include it in the scope of this project,” said board member Sue Cosper. “I would be more supportive of looking at it separately. I think we have an overwhelming amount of feedback that would suggest this [digital assets] to be a priority for the board, and I don’t see the commodity issue to be a priority over maybe some of the other projects we’ve been discussing as part of the ITC [invitation to comment].”
“As it relates to commodities, I would make the point that the intent for holding those commodities can be very different,” said board member Marsha Hunt. “We do have examples in GAAP where intent impacts the outcome. I think the intent as it relates to the digital assets — the opportunities as it relates to digital assets — are much less as to how to ultimately realize them. Therefore I agree with the staff that these would be separate projects and should not necessarily be linked.”
“I think board members have said we may get smarter as we go down the path of the digital asset project, and while I don’t think they necessarily should be linked, there may be a logical sequencing that we may learn something that may ultimately result in improved accounting or disclosure for the use by some entities of their commodities, but at this time I would consider that a secondary project, and I would not include that in the original project,” she added.
Hunt also is interested in seeing ongoing monitoring of the exchanges, and if the exchange is the basis for the valuation, she believes it’s important to have some clarity and transparency about how that value has been determined.
“I support adding a project to evaluate the recognition and measurement of digital assets and I think the disclosure is as important,” said board member Gary Buesser. “My initial thought is that we should first focus on disclosure. If and when digital assets become a pervasive issue on companies’ balance sheets, and I don’t think we’re there yet — a few companies yes, most companies no — then we would address the recognition and measurement. We all recognize the current intangible asset accounting is not the optimal solution. What if investors told us they want more transparent disclosure around digital assets, first to quantity, second cost and third fair value? Especially important is how it is measured. Therefore, a disclosure-only project would address investors’ immediate request to provide more transparent disclosure on digital assets.”
He believes the commodities issue should probably be addressed in a separate hedging project.
FASB chair Jones agreed with the other board members on adding a recognition and measurement project on digital assets with consideration of presentation and disclosure. He pointed out that digital assets is a broad topic.
“As we look at this, I think it’s going to be very important that we narrow that scope dramatically,” said Jones. “There are an awful lot of things in the digital assets space today since everything is digital.”
He suggested focusing on owned assets, fungibility, liquidity and broad holding. He believes it can fit in as a subset of the existing guidance on intangibles, albeit with a different recognition and measurement approach.
“I’m hoping what we do can be agnostic as to means of acquisition,” Jones added. “It doesn’t seem like how you got the digital asset should necessarily matter if it meets all the same criteria. I think that would help us answer all the questions that would otherwise come up if we were to pick a model based on means of acquisition.”
Gains and losses will also be essential issues to many company investors. “I do think that the question on unrealized gains or losses as opposed to realized gains and losses is going to be important,” Jones noted. “That will require us to determine an ordering policy for determining them very similar to what companies have to do in the investment company guide. I certainly favor leveraging the current fair value disclosures to the extent we go down the fair value model. I think that makes sense, and I think one of the key questions will be what we will do to supplement it and is there additional information that’s unique here.”
During the meeting, FASB also discussed other potential agenda projects, including income tax disclosures and the requests for reporting on environmental, social and governance issues. In terms of potential disclosure improvements to income taxes paid and the rate reconciliation, FASB board members directed the staff to further explore, through outreach and research, approaches to disaggregate income taxes paid by jurisdictions and require disclosure of individual reconciling items in the rate reconciliation on the basis of a quantitative threshold and specific categories of reconciling items, such as the foreign tax rate differential by jurisdictions. However, no decisions were made.
The board members also talked about stakeholder feedback they received on ESG-linked financial instruments in response to last year’s invitation to comment on its future agenda. However, the board made no technical decisions and instead directed the staff to continue doing pre-agenda research, which will be considered in a future meeting where FASB will decide whether to add a project on accounting for financial instruments with ESG-linked features to its technical agenda.