Interpretation of the first version of the cryptocurrency accounting system in the United States: the spring of large currency-holding companies?

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jk
4 months ago
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Encourage more companies to choose cryptocurrencies in their investment decisions.

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Author - jk

Interpretation of the first version of the cryptocurrency accounting system in the United States: the spring of large currency-holding companies?

On Wednesday, December 13, local time in the United States, the U.S. Financial Accounting Standards Board (FASB) issued its first cryptocurrency accounting rules. Companies will be required to calculate fair value for their cryptocurrency holdings and document this in their quarterly and annual financial reports. This new rule allows companies that hold cryptocurrencies to record the highs and lows of cryptocurrencies, thereby potentially encouraging more companies to choose cryptocurrencies in their investment decisions.

What are FASB and accounting standards? How is it different from before?

Simply put, accounting standards are accounting rules chosen by American companies (actually widely used by international listed companies) to establish a common standard in financial-related data statistics.FASB (Financial Accounting Standards Board) is the organization responsible for formulating financial accounting and reporting standards in the United States. It sets accounting standards that have been widely used by public companies and many other types of businesses since the 1970s.These standards are called Generally Accepted Accounting Principles (GAAP).

GAAP is a set of accounting principles, standards and procedures used to prepare and report financial information. These standards provide a common framework for accounting and financial reporting, allowing investors, managers, financial analysts and other stakeholders to effectively understand and compare the financial reports of different companies.In the simplest terms, these rules established by the FASB establish a uniform financial reporting format and statistical methodology for public companies.

Prior to the issuance of this cryptocurrency accounting rule, companies that did not qualify as investment companies (such as Tesla, etc., whose main business is not asset management) had defaulted to the American Institute of Certified Public Accountants’ practice guidance, which treated cryptocurrency as intangible Assets, a category that includes assets such as trademarks, copyrights, and brands. Significantly unlike cryptocurrencies, these assets are rarely traded.

This treatment means the company records its tokens at the price paid when they purchased them, and permanently writes them down when their price falls below the purchase price. But when the value of a cryptocurrency rises, they cant record the gain in their financial statements; they can only record it when they sell their cryptocurrency holdings and realize the gain.Obviously, this part of the accounting standard is not suitable for frequently traded cryptocurrencies. The earnings of MicroStrategy, the public company with the largest holdings of Bitcoin, are often dragged down by this accounting practice, because the appreciation of Bitcoin price cannot be recorded in the financial statements unless they choose to sell.

Now, companies can use this rule to measure token holdings at fair value. Since changes in fair value will be recorded in net income, tokens can be reported at the latest market value, and appreciation of the digital currency on the companys balance sheet will be recorded in the companys balance sheet without being sold. of income.

So, the crypto industry has asked the FASB for rulemaking three times since 2017, but the accounting rulemakers have only now confirmed implementation of the new rules.

Scope and time of application

According to a report by Bloomberg, the FASB intends to set the scope of the new accounting rules relatively narrow.NFTs are excluded, and stablecoins and tokens created by issuers (such as FTT issued by the exchange FTX itself) do not apply to these new rules and cannot be recorded in financial reports.Wrapped tokens that emerge via bridges, such as WBTC, are also not covered by the new rules.FASB members said they would be willing to address more cryptocurrency issues in the future if these issues become common in practice.

The new rules will take effect for public and private companies for fiscal years beginning after December 15, 2024, which means 2025 for companies with a calendar year end.Companies can choose to start following these rules well before the deadline.In other words, in the midst of an upward cycle, we can see cryptocurrencies being recorded according to market value as soon as this year’s financial report.

What are the implications of this new accounting standard?

The most direct impact of this accounting standard on the company is thatPublicly traded companies will be more likely to start investing in cryptocurrencies.According to previous accounting standards, the price of cryptocurrency after appreciation cannot be recorded in financial reports, but the price of loss needs to be recorded;It is equivalent to the financial report only recording bad news rather than good news about cryptocurrency investment, which is not a good thing for the stock price that is closely related to the financial report.Now, companies will be more likely to add cryptocurrencies to their portfolios during rising cycles and be able to record the appreciation of these assets in their earnings reports.

At the same time, investors will more clearly find the cryptocurrency holdings of public companies. Under the new rules, companies will need to make a separate entry on their balance sheets for their crypto assets. They must also disclose significant cryptocurrency holdings and any restrictions on those holdings in a footnote for each reporting period. On their annual reports, they will have to reconcile or disclose changes in the opening and closing balances of their crypto assets, broken down by category.

How has the response been from crypto KOLs?

Odaily previously reported that MicroStrategy founder Michael Saylor posted on the X platform that the upgrade of US accounting standards will promote global companies to adopt BTC as a reserve asset. David Marcus, former president of PayPal and former head of cryptocurrency at Meta, commented that this seemingly small change in accounting standards is actually significant, and it removes a major obstacle for companies to include Bitcoin on their balance sheets. 2024 is shaping up to be a landmark year for Bitcoin.

The Bloomberg report also wrote, It is wonderful to receive this gift of accounting in this season, said Edward McGee, chief financial officer of Grayscale Investments.

For some types of cryptocurrencies, fair value can be difficult to get right, said PJ Theisen, a partner at Deloitte Touche LLP. “It sounds pretty straightforward,” Theisen said. “One thing to keep in mind is that it can be challenging, especially with cryptoassets, to actually determine what their fair value is.”

Admittedly, there will be no shortage of dissenting voices in the market: “I think cryptocurrencies are a bunch of pet rocks,” Democratic Rep. Brad Sherman said at a related hearing. “It doesn’t belong on the balance sheet.”

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