The Fair Value is coming, and the new accounting standards for cryptocurrencies in the United States will take effect at the end of the year.

Original author: Mary Liu, BitpushNews

The Financial Accounting Standards Board (FASB) in the United States has unanimously voted to change the accounting and disclosure for company holdings of cryptocurrencies such as Bitcoin and other digital assets. The new rules will take effect in 2025 and aim to provide greater transparency for investors and other users of financial statements regarding these volatile assets.

Established in 1973, FASB is the standard-setter for accounting principles of publicly traded companies in the United States.

What has changed?

Currently, U.S. companies do not have specific accounting or disclosure rules for cryptocurrency assets. Cryptocurrencies are classified as indefinite-lived intangible assets, similar to copyrights and other intellectual properties. Companies must review the value of such assets at least annually and write them down if their value falls below the purchase price. If the value increases, companies can only recognize the gains when the asset is sold and not when it is held.

Under the new rules, companies will be required to separately account for their cryptocurrency assets to provide clarity to investors and other readers of financial statements about the company's investment value in cryptocurrencies.

In addition, they will disclose significant holdings of cryptocurrencies and any restrictions on those holdings in footnotes for each reporting period. They must reconcile or disclose changes in the beginning and ending balances of cryptocurrency assets by category annually. FASB agreed that they do not need to include information about cryptocurrencies received as payment and immediately converted into cash in the reconciliation activities.

FASB agreed that, since cryptocurrencies will be measured at fair value, companies will follow the disclosure requirements in applicable accounting standard ASC 820 to let financial statement users know how they arrived at their measurement results.

The new FASB rules will require companies to account for digital assets at fair market value, capturing frequent price fluctuations, with gains and losses recorded in the income statement.

These rules also expand disclosure requirements, including detailed information such as the cost basis of major cryptocurrency holdings, restrictions on asset sales, and adjustments to cryptocurrency asset activities during the period from the beginning to the ending balance.

The new requirements apply to cryptocurrencies like Bitcoin and Ethereum, as well as stablecoins pegged to fiat currencies, but exclude non-fungible tokens (NFTs) and wrapped tokens.

All publicly traded and private companies will be required to adopt the new rules, with the effective date set for fiscal years beginning after December 15, 2024, allowing for early adoption.

FASB Chairman Richard Jones said, "I don't think there's been anything that's generated as much passion in my relatively short tenure as this has. We've heard from the vast majority of capital allocators who rely on financial statements that this will give them better information to make decisions, so I'm fully supportive."

FASB board member Christine Botosan agreed, saying, "It's not often that we get a combination of lowering system costs and improving decision-usefulness of information, so when we can do both, it makes voting pretty easy."

How will this impact publicly traded companies?

According to current regulations, companies must record the amount of cryptocurrency held at the original cost. If the value falls below the cost, it is recorded as "impairment expense." However, if the price rises, it cannot be recorded unless it is immediately sold. This approach has been criticized by the crypto community for only reflecting one aspect of value changes.

Tesla, a car manufacturer, Block, a payment company, and MicroStrategy, a software provider, are a few of the publicly traded companies that hold cryptocurrencies on their balance sheets.

Michael Saylor, Co-founder and CEO of MicroStrategy, said, "Fair value accounting is about to enter Bitcoin, and this upgrade to the FASB accounting rules removes a major barrier for companies adopting BTC as inventory assets."

Swan Bitcoin tweeted, "This will undoubtedly benefit Bitcoin."

Financial analyst Stack Macro pointed out, "Without changing this rule, most publicly traded companies would not be able to hold Bitcoin as a store of value. Companies with plenty of cash now have a way to protect their portfolios from devaluation."

Industry observers state that accounting standards specific to cryptocurrency can mitigate concerns of impairment expenses caused by market volatility for companies.

Berenberg analyst Mark Palmer stated in his tweet that the updated rules should help MicroStrategy and other companies holding digital assets to eliminate negative perceptions arising from impairment losses under existing FASB guidelines.

Palmer noted that since buying Bitcoin in August 2020, MicroStrategy has reported $2.2 billion in impairment losses, which sends the wrong message to investors.

Jeff Rundlet, Director of Strategy at accounting software company Cryptio, believes, "This is a big step forward for the entire cryptocurrency market. I think this is a big step towards mainstream adoption. Ultimately, the proposal is intended to help larger companies who may be afraid to hold cryptocurrencies on their balance sheets due to the complexity of the technology."