In a significant move for the financial world, the Financial Accounting Standards Board (FASB) in the United States released the inaugural set of accounting rules for cryptocurrencies on December 13, a development that could herald a new era for major corporations. Under these regulations, companies are required to calculate the fair market value of their cryptocurrency holdings and record them in their quarterly and annual financial reports. This groundbreaking rule change enables companies to document the highs and lows of their cryptocurrency investments, potentially encouraging more enterprises to consider cryptocurrency in their investment strategies.
FASB and Cryptocurrency Accounting Standards: What Sets This Apart?
In essence, accounting standards are the rules adopted by US companies (widely applicable to international publicly traded companies) to establish a common standard for financial-related data statistics. The Financial Accounting Standards Board (FASB) is the institution responsible for formulating financial accounting and reporting standards in the United States. These standards, known as Generally Accepted Accounting Principles (GAAP), have been widely employed by various businesses, including publicly listed companies, since the 1970s.
GAAP is a set of accounting principles, standards, and procedures used for compiling and reporting financial information. These standards provide a common framework for accounting treatment and financial reporting, allowing investors, managers, financial analysts, and other stakeholders to effectively understand and compare the financial reports of different companies. Simply put, the rules set by FASB determine the uniform financial report format and statistical methods for publicly listed companies.
Before the release of these cryptocurrency accounting rules, companies not eligible for investment firms (e.g., Tesla, whose primary business is not asset management) defaulted to the practices outlined by the American Institute of Certified Public Accountants. This guidance treated cryptocurrencies as intangible assets, akin to trademarks, copyrights, and brands. However, these assets, unlike cryptocurrencies, are rarely traded.
Under this approach, companies recorded their tokens at the price paid during purchase and permanently impaired them when their value fell below the purchase price. However, when the value of cryptocurrencies increased, they were unable to record these gains in financial reports unless they chose to sell the cryptocurrency holdings.
Now, companies can measure their tokens at fair value, as per this new rule. Since changes in fair value will be recorded in net income, the appreciation of digital currency on a company’s balance sheet can be documented without being sold.
So far, the cryptocurrency industry has requested FASB to establish rules three times since 2017, and it’s only now that the accounting rule-makers have confirmed the implementation of the new regulations.
Scope and Timeline of Application
According to reports from Bloomberg, FASB intends to set a relatively narrow scope for the new accounting rules. Non-fungible tokens (NFTs), stablecoins, and tokens created by issuers (such as FTX’s FTT token) are excluded from these new rules and cannot be recorded in financial reports. Wrapped tokens, such as Wrapped Bitcoin (WBTC), emerging through bridging, are also outside the coverage of the new rules. FASB members have stated that if these issues become widespread in practice, they are willing to address more cryptocurrency-related issues in the future.
The new rules will take effect for both public and private companies for fiscal years beginning after December 15, 2024, meaning for companies with calendar year-end, it will be effective in 2025. Companies can choose to adopt these rules before the effective date. In other words, in the ongoing bullish cycle, we might see cryptocurrency recorded at market value in financial reports for this year at the earliest.
Impact of the New Cryptocurrency Accounting Standards
The most direct impact of this accounting standard on companies is that publicly listed firms are more likely to start considering investments in cryptocurrencies. Under the previous accounting standards, the appreciation of cryptocurrency prices couldn’t be recorded in financial reports, while the loss had to be documented. Essentially, financial reports only reflected bad news about cryptocurrency investments, not good news, which was not favorable for stock prices closely tied to financial reports. Now, companies in an upward cycle are more likely to include cryptocurrencies in their portfolios and can record the appreciation of these assets in their financial reports.
Simultaneously, investors will have a clearer picture of the cryptocurrency holdings of publicly listed companies. According to the new rules, companies need to create a separate entry for their cryptocurrency assets in their balance sheets. They also have to disclose significant cryptocurrency holdings and any restrictions on these holdings in footnotes during each reporting period. In annual reports, they will have to reconcile or disclose changes in the opening and closing balances of their cryptocurrency assets, categorized.
How Cryptocurrency Influencers Are Reacting
Previously reported by Odaily, Michael Saylor, the founder of MicroStrategy, expressed on the X platform that the US accounting standard upgrade will encourage global enterprises to adopt Bitcoin as a reserve asset. David Marcus, former President of PayPal and former head of Meta’s cryptocurrency division, commented that this seemingly minor accounting rule change has significant implications as it removes a major barrier for companies to include Bitcoin on their balance sheets. For Bitcoin, 2024 is poised to be a milestone year.
Bloomberg’s report also quoted Edward McGee, Chief Financial Officer of Grayscale Investments, stating,
“Getting this accounting gift at this time of year is fantastic.”
However, not everyone in the market is supportive. Democratic Congressman Brad Sherman expressed his skepticism about cryptocurrency, stating during a relevant hearing,
“I think cryptocurrency is a pile of pet rocks. It doesn’t belong on the balance sheet.”
Read more: Decoding the Future: Microstrategy’s view of Bitcoin’s Ascension to $10 Million
Conclusion: A New Chapter for Cryptocurrency in Corporate Finance
In conclusion, the introduction of cryptocurrency accounting rules by FASB represents a crucial step in the evolution of the financial industry. The impact of these rules, set to take effect in 2025, is poised to reshape how companies approach and report their cryptocurrency investments. With the potential to unlock the true value of cryptocurrency holdings in financial reports, this move could lead to increased adoption of cryptocurrencies by major corporations globally. As the cryptocurrency market continues to mature, these accounting changes signal a new chapter in the integration of digital assets into traditional financial practices.