Nhi Tran, Senior Associate at Graphite
While the crypto market has had its ups and downs, these decentralized currencies are here to stay. Accounting guidance hasn’t kept pace with these changes, though, leading to lots of uncertainties for organizations on how to account for these volatile assets.
Right now, the official accounting guidance surrounding cryptocurrencies doesn’t reflect the unique nature of these assets or the way that crypto transactions work. Not only does this create a huge headache for organizations that are already using crypto, but it also deters anyone who might be interested in incorporating crypto into their business model in the future.
This is hopefully about to change with the introduction of new crypto asset guidelines from the Financial Accounting Standards Board (FASB). Here’s what you need to know about this upcoming guidance and how it will affect your crypto accounting.
Crypto Accounting Basics
Before we talk about changing crypto guidelines, it’s important to understand some of the basics of how crypto works and how it’s currently handled in accounting.
- Blockchain-based: All crypto assets are created and stored using blockchain technology. The blockchain is a decentralized digital ledger that tracks assets and records transactions.
- Robust security: The blockchain is extremely secure and uses cryptography to keep your assets and transactions safe.
- Intangible assets: Crypto assets don’t have a physical form and are therefore considered intangible assets.
- No claims on real assets: Crypto assets do not grant you any legal rights to physical goods, services, or other real assets.
- Easy interchangeability: Crypto assets are fungible, which means they can be easily exchanged with other similar assets.
- No internal issuance: Your crypto assets should not be created or issued by your organization or any affiliated parties.
Until Now, Crypto Has Been a Point of Confusion
Crypto functions differently from other assets, as transactions are secured on the blockchain and are almost impossible to track without additional technology, like crypto accounting software. On top of that, many cryptocurrencies experience huge fluctuations in price in a relatively short amount of time.
Right now, entities must account for crypto guidance using FASB’s ASC 350 guidance for indefinite-lived intangible assets. This means that the value of an organization’s crypto assets is carried on the books at the lowest value it’s ever been, even if its value has increased significantly since then.
Drops in the value of crypto assets are recorded as impairment losses, but gains are not recorded until these assets are sold. This means that if your organization has a significant amount of crypto assets, your books won’t necessarily reflect your current financial status.
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FASB New Crypto Guidelines Are Here to Clear it Up
Luckily, FASB proposed an ASU (Accounting Standards Update) in March, and it better reflects the way that crypto assets function in the real world. This guidance has not been finalized yet but is likely to be made official later in 2023 and implemented immediately.
These new FASB crypto guidelines will allow you to report crypto assets at fair value, which is similar to how stocks and other exchange-traded securities are recorded now. This means that you will be able to record gains and losses in value.
It’s important to note that these new guidelines won’t cover non-fungible assets like NFTs. Many people associate NFTs with cryptocurrencies since they both exist on the blockchain, but they function differently.
For now, these FASB guidelines won’t address non-fungible assets. It’s also important to note that these guidelines won’t apply to any assets created by the reporting entity or any related parties. This means that if you launch your own cryptocurrency and use it in-house, these guidelines won’t apply.
Additionally, this guidance will only apply to coins that are traded on official exchanges. Small or new coins that aren’t listed on an exchange won’t be subject to this documentation.
Adapting to the New Guidelines
This new guidance will be implemented immediately once it is approved, which differs from other FASB guidance like ASC (Accounting Standards Codification) 606 which took three years to implement.
For organizations with crypto assets, this guidance will change your financial reporting, but it uses data that you will have already compiled. Reconciling your books for tax season may have some new nuances, but ultimately, this guidance won’t change your tax accounting.
For organizations already using a subledger, this guidance shouldn’t change anything operationally but will change your reporting. However, if you aren’t already using a subledger—a tool that provides a detailed log of your transactions—now is the time to implement one.
Because of the secure nature of the blockchain, crypto transactions are almost impossible to track on their own, so a highly detailed tracking system is a necessity.
Navigate Evolving Crypto Regulations with Graphite
Web3 and crypto are still relatively new, and that means that standards and regulations are changing rapidly. If you’re accepting these currencies in your organization, you need to have a crypto accounting expert to lean on.
That’s where Graphite comes in. Our accountants have extensive experience working with startups in the Web3, crypto, and DeFi spaces and will help you with things like incorporating a subledger, building crypto documentation, and properly classifying your transactions so you’re ready to scale.
Need help navigating ever-evolving crypto regulations? Check out some of the ways that we can step in to help.
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