Background
Prior to the adoption of ASU 2023-08, entities, except those within the ambit of the investment-company guidance in ASC 946 or certain types of broker-dealers, accounted for crypto assets as indefinite-lived intangible assets in accordance with ASC 350, Intangibles – Goodwill and Other. This entailed measuring the assets at historical cost less impairment. Notably, these crypto intangible assets were not amortized but were written down
(impaired) to fair value whenever their fair value fell below their carrying amount. Such impairments were, however, deemed permanent and were not reversed, even if the fair value of the asset recovered during the same reporting period.
Among other factors, this intangible asset model (1) did not faithfully represent the economics of crypto assets and (2) made the recognition of impairments needlessly complex by requiring entities to use a crypto asset’s lowest observable fair value within a reporting period.
With the aim to enhance decision-useful information about such assets and to better reflect the underlying economics of cryptocurrency transactions not just for users of cryptocurrencies but also for preparers and auditors, FASB issued ASU 2023-08, Accounting for and Disclosure of Crypto Assets on December 13, 2023 (‘ASU’), which introduces Subtopic 350-60 (Crypto assets).
Who is impacted by the amendment?
Entities scoped-in:
The amendments in this ASU apply to all entities (both private and public companies) holding certain crypto or digital assets but do not apply to entities applying industry-specific US GAAP (e.g. Topic 946 on investment companies).
Scoped-in digital assets:
- Digital assets in scope of this ASU (‘in-scope crypto assets’) would likely include bitcoin, ethereum, doge and many smaller crypto assets by market cap e.g., litecoin.
- Para BC15 of the ASU clarifies that crypto assets created or issued by a reporting entity or its related parties are excluded from the scope of this ASU – which would mean that the existing intangible asset accounting model would apply. Therefore, issuer’s accounting for crypto assets is outside the scope of this ASU
What are the main provisions of the amendment?
Subsequent Measurement:
The new guidance requires entities to subsequently measure certain crypto assets at fair value, with gains or losses from remeasurement recorded in net income in each reporting period
Presentation:
The crypto assets are presented separately from other intangible assets on the face of the balance sheet. Similarly, gains and losses from remeasurement are presented separately from impairments or other changes in carrying amount (eg amortization) of other intangible assets
Disclosure:
Enhanced disclosures about holding and activity of crypto assets for interim and annual reporting
Overview of changes in current practice upon adoption of ASU
The PDF explains Guidance Categories, Extent of potential impact, Existing guidance on accounting of and auditing of digital assets guidance1 and Amendments proposed by ASU 2023- 082
When is the amendment effective?
Annual and interim periods
All entities for fiscal years beginning after December 15, 2024 (Calendar year 2025 or fiscal year 2026 onwards)
Is early adoption permitted?
Yes, in any interim or annual period for which an entity’s financial statements have not been issued (or made available for issuance) as of the beginning of the entity’s fiscal year.
How should entities account for transition?
In accordance with the ASU, entities are required to adopt the new Subtopic on a modified retrospective basis. When implementing the final standard, entities must record a cumulative-effect adjustment to retained earnings or other appropriate components of equity or net assets as of the beginning of the annual period of adoption. Any retroactive restatement will not be required or permitted for prior periods.
This approach will result in a cumulative-effect adjustment, including related tax consequences (including impact of the Corporate Alternative Minimum Tax (‘CAMT’) that was introduced by the Inflation Reduction Act, 2022 (effective for taxable years beginning after December 31, 2022), to retained earnings or other appropriate components of equity or net assets as of the beginning of the adoption fiscal year. It will be calculated as the difference between the carrying amount of in-scope crypto assets as of the beginning of the annual reporting period in which the entity adopts the ASU and the carrying amount of those crypto assets as of the end of the prior annual reporting period.
If an entity adopts the amendments in an interim period, they must adopt them as of the beginning of the fiscal year that includes that interim period.
Comparison to IFRS, as issued by IASB
In June 2019, the IFRS Interpretations Committee (‘IFRIC’) clarified that cryptocurrencies (a subset of crypto assets that have certain characteristics that differ from the scope of the amendments in this ASU) held for sale in the ordinary course of business should be measured at the lower of cost and net realizable value in accordance with IAS 2, Inventories, unless the asset holder is a commodity broker-trader, in which case the cryptocurrencies should be measured at fair value less costs to sell. All other holdings of cryptocurrencies should be accounted for in accordance with IAS 38, Intangible Assets.
IAS 38 requires impairment testing of intangible assets, which is similar to current US GAAP. However, unlike current US GAAP, impairment losses may be reversed under certain circumstances. In addition, entities may elect to carry an intangible asset with an active market at a revalued amount, which is its fair value at the date of revaluation less any accumulated impairment losses that are recognized after the revaluation date. IFRS require that any changes in fair value above historical cost be recognized in other comprehensive income, while any changes in fair value below historical cost should be recognized in profit and loss.
There are similarities between the amendments in this Update and the IFRS revaluation model. One important similarity is that for crypto assets traded in active markets, if entities elect to apply the revaluation model in IAS 38, both require recognition of crypto assets at fair value on the balance sheet. There also are four key differences between the amendments and IFRS.
Those differences are that:
- The amendments apply to a subset of crypto assets that differ from cryptocurrencies as described by the IFRIC.
- The amendments require fair value measurement for crypto assets (a subset of intangible assets), whereas the revaluation model under IFRS is an election for intangible assets.
- The amendments require fair value measurement for crypto assets, whereas the revaluation model under IFRS requires reference to an active market for measuring at fair value.
- The amendments require the recognition of all remeasurements of crypto assets in net income, whereas IFRS requires recognition of any gains above original cost in other comprehensive income without recycling to net income.
