FASB fair-value play poised to clear crypto barrier

The Financial Accounting Standards Board (FASB)’s recent decision to move toward making fair value the primary accounting method for measuring crypto assets is poised to resolve a reporting issue that may have held some CFOs back from putting digital assets on their balance sheets.

“While there are other areas where accounting for crypto assets continue to be tricky, [this] takes away a deterrent from getting involved with crypto assets,” Sean Prince, a partner in the national office of the accounting and consulting firm Crowe LLP, told CFO Dive.  

The FASB’s tentative decision on the matter last week came after the U.S. accounting standards setter heard from hundreds of stakeholders who have been clamoring for the change. Many favored the shift to fair value from the current practice that has generally been interpreted to mean that crypto assets “should be impaired to the lowest observable fair value within a reporting period.” 

Crypto companies as well as financial report preparers have been critical of the current practice which generally treats cryptocurrency as an intangible asset and have advocated for the change. The board’s move last week “is really the decision that everybody’s been waiting for,” Scott Muir, a partner in the department of professional practice of KPMG U.S., said in an interview. “Fair value is always going to be a better measurement than the historical cost less impairment model regardless of whether we’re in a period of volatility or not.” 

The fair value accounting method in theory could also be simpler, because a company would report the value of the asset based on its level on a given exchange at the end of the reporting period, rather than having to follow the ups and downs of an asset’s value through a reporting period to report the lowest level.

Avoiding a mismatch

The relatively arcane accounting change now in the works was also hailed by some cyrpto executives as a move that could encourage more companies to adopt crypto. Edward McGee, CFO of one of the largest digital asset managers Grayscale Investments, has been among the proponents in the industry that have called for FASB to quickly elect fair value for measuring crypto assets. 

“It’s incredibly encouraging to see FASB react to an issue like crypto-accounting after receiving overwhelming commentary from crypto-native firms, banks, broker dealers, corporate enterprises, accounting firms — all of whom support fair-value accounting,” McGee wrote in an emailed statement sent to CFO Dive. 

Once the guidance is finalized, “corporate balance sheets and PnLs can then be managed and reflected correctly, meaning there will no longer be a PnL mismatch for the asset and the instruments used to hedge the volatility of the asset,” he wrote. In turn, he wrote that the resolution of the accounting issue will “absolutely help corporate CFOs adopt crypto assets on their balance sheets,” as they would finally have the codification and guidance needed to address the types of disclosures and risks that should be reflected in their financial statements. 

The final adoption of the new standards is likely to take place sometime in the first half of 2023, according to Prince and McGee. While the timing is difficult to predict, Muir said the fair value project’s speed would likely be aided by the widespread support the issue has behind it.

The issue is moving forward at an extradorinarily difficult time for crypto companies and investors. The Nasdaq Crypto Index has fallen about 60% this year to date as of Monday afternoon, while the S&P 500 index has declined about 23% over the same period.