Financial Standards Accounting Board Updates Digital Asset Accounting Treatment
The Financial Accounting Standards Board has decided to require companies to measure digital assets and cryptocurrency at fair value. This is a very large change in digital asset accounting and cryptocurrency accounting standards. Before this decision The Financial Accounting Standards Board required digital assets and cryptocurrency such as Bitcoin to be measured using the cost minus impairment method.
We will go over the digital asset accounting and cryptocurrency tax implications to this accounting change. We’ll also discuss the impact that this cryptocurrency accounting change will have on the digital asset and cryptocurrency industry.
Cost Minus Impairment v. Fair Value Measurements
Fair market value is the amount of money a company can expect to receive if they sold their digital asset or cryptocurrency on the open market. A cost impairment is a cost that shows a reduction in the carrying value of a specific digital asset or cryptocurrency on a balance sheet. This occurs when a digital asset or cryptocurrency’s book value exceeds its fair value in the market.
Previously, companies carrying digital assets and cryptocurrency on their balance sheet would have to take impairment losses when their volatile digital assets and cryptocurrency decreased in price. Due to the changes from The Financial Accounting Standards Board now will require companies to report the digital asset and cryptocurrency on their balance sheet at fair market value.
Digital assets and cryptocurrency such as Bitcoin or Ethereum are fungible, and do not generate cash flows. In most cases, that rate of exchange is observable in the marketplace and subject to significant volatility in both directions. These factors make fair value the most relevant and faithful measurement for these assets since they are distinct from other intangible assets for which the indefinite lived intangible asset model was designed.
This accounting method change will allow companies to represent the fair value and overall economics of the volatile crypto assets more accurately. We expect that this accounting change will help accelerate institutional adoption of digital assets and cryptocurrencies. Since there will no longer be a discrepancy between the fair market value and reported carrying value of their digital asset and cryptocurrency on their balance sheet many companies reconsider holding digital asset and cryptocurrency.
Patrick Camuso, CPA, managing member of Camuso CPA was quoted in an Accounting Today article on this topic.
“Intangible accounting did not reflect the overall nature of cryptocurrency assets which share more similarities with financial assets than intellectual property and other intangible assets. The intangible accounting approach did not provide the best method for companies to prepare financial statements in a manner that reflected their current financial condition. “
This change will allow for greater transparency in financial statements. This will also simplify accounting requirements for companies who will report the fair market value of crypto assets they own rather than tracking impairment changes for each crypto asset purchased across different time periods. Overall, this change will lead to greater transparency for financial statement users and practical accounting requirements for companies issuing financials.
About Camuso CPA
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- Schedule a time to speak with our team in detail about your taxes and accounting.
- Read our Definitive Guide for Cryptocurrency Taxation to learn about cryptocurrency taxes from an experienced CPA.
- Read our Cryptocurrency Tax Planning Guide to learn about digital asset and cryptocurrency tax planning from an experienced CPA.