Historically, cryptocurrencies such as Bitcoin and Ethereum were accounted for as intangible assets and reported on the balance sheet at cost. These assets were deemed to be impaired when the price drops below cost, but are not marked up when the price recovers. This treatment was extremely unfavorable to the reporting entity’s balance sheet. It results in assets potentially being valued at the lowest market price, causing companies to report large unrealized losses.
Intangible assets such as goodwill, do not fluctuate like this and justify this treatment. In order to mark up intangible assets, there needs to be a market transaction i.e. a sale or a previous mark-down mistake, and possibly a significant event explaining the markup. In Either case, it’s clear this treatment should not be applied to a volatile asset such as Bitcoin.
On August 31, 2022, The FASB (financial accounting standard board) unanimously decided to narrow the scope for crypto under intangible assets, for a treatment that is appropriate for this new asset class. The scope for digital assets must meet the following five criteria.
1. Meet the US GAAP definition of intangible asset
2. Does not provide the asset holder with enforceable rights to, or claims on, underlying goods, services or other assets
3. Reside on a distributed ledger (i.e., blockchain)
4. Are secured through cryptography
5. Are fungible
On October 12, 2022, The FASB decided to require all entities, with investments in in-scope crypto assets to measure those assets at fair value with gains and losses recorded in the current period’s comprehensive income. This is great news for the crypto industry, as now companies can purchase assets, without concern of triggering large impairment losses.
The scope is intended to be applied broadly to digital assets, however, I wonder if governance tokens are disqualified. Scope number 2, excludes tokens with enforceable rights. Many of the digital asset tokens have governance utility properties, which can determine applications’ revenue share, development decisions, and treasury management. Would a token like UNI for the Uniswap exchange be excluded from being measured at fair value?
The industry still needs further guidance from FASB as well as financial regulators. The DeFi ecosystem presents an overwhelming amount of new assets and financial transactions. Many of the current laws can be extrapolated and applied, however many are not comparable. This should be expected when a disruptive technology is reshaping a century-old financial system.