Overview
In December 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-08, Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets.” This new ASU introduced significant changes to how crypto assets are accounted for under U.S. Generally Accepted Accounting Principles (GAAP), aiming to improve financial reporting for entities holding such assets.
Key Changes
Fair Value Measurement
Companies and nonprofit organizations are now required to measure qualifying crypto assets at fair value, with changes recognized in net income. This replaces the previous cost-less-impairment model, which allowed only impairment losses to be recorded, not unrealized gains. This is a significant change as the cost-less-impairment model required that the carrying value of the crypto assets be impaired when the trading price of the asset fell, with no ability for the carrying value to be restored if the trading prices recover. The fair value method will provide a more accurate representation of the value of these assets to nonprofit organizations and companies that hold them.
Eligibility Criteria of Crypto Assets
This new guidance only applies to crypto assets that meet the following criteria:
- Qualify as intangible assets;
- Are based on blockchain or similar technology;
- Are fungible, meaning that each unit holds the same value, and are secured through cryptography;
- Do not grant rights to underlying goods or services;
- Are not issued by the reporting entity or its related parties.
Presentation Requirements
- Crypto assets must be presented separately from other intangibles on the balance sheet or statement of financial position.
- Changes in fair value must be shown distinctly on the income statement or statement of activities.
- For crypto assets received and liquidated almost immediately (e.g., donations or customer payments), the resulting cash flows must be presented as operating activities in the statement of cash flows.
- The only exception to this is with donations to nonprofit organizations that have donor restrictions in place. In this situation, the resulting cash flows are recognized as financing activities on the statement of cash flows.
Disclosure Changes
The notes to the financial statements must disclose:
- Significant crypto asset holdings, including the name, cost basis, fair value, and units held,
- An annual rollforward of the crypto activity, including additions, dispositions, gains, and losses,
- Restrictions on the sale of crypto assets, including duration and circumstances for expiration.
Effective Date
The changes apply to fiscal years beginning after December 15, 2024. This means that entities with calendar year-ends will adopt this standard in their financial statements for the year ending December 31, 2025, and for the year ending June 30, 2026, for most nonprofit organizations. Implementation requires a cumulative-effect adjustment to the beginning balance of retained earnings or net assets.
Other Considerations
Potential for Cost Savings
The elimination of impairment testing simplifies accounting processes and could reduce both the cost and time associated with valuations, particularly for frequently traded crypto assets.
Potential for Increased Volatility in Earnings
For entities that choose to hold crypto assets as a part of their investment portfolio, the requirement to mark crypto assets to fair market value through net income could introduce volatility, especially for those entities with significant crypto asset holdings.
Conclusion
FASB’s ASU 2023-08 creates a needed advancement in accounting guidance for crypto assets. Companies and nonprofit organizations should prepare for the adoption of this standard and discuss any questions they have with their external accounting professionals ahead of their fiscal year-end.
For more information or questions about this article or to find out how Windes can assist, please contact our Nonprofit Team at nonprofit@windes.com.
This article was written by Windes Nonprofit Audit Manager AJ Hamon.
AJ Hamon, CPA
Nonprofit Audit Manager
ajhamon@windes.com