This is an opinion piece by Matt Maraia, a CPA who seeks to help educate the Bitcoin community on the ever-changing regulations on accounting standards.
As the evolving digital asset ecosystem continues to pose more questions than answers within the accounting industry, members of the Financial Accounting Standards Board (“FASB”) have delivered some groundbreaking news. On May 11, 2022, the FASB voted for to hold future discussions on the current dilemma presented by business investments in cryptocurrencies, signaling a potential overhaul of current accounting guidelines on digital assets.
This action was prompted by recent developments in companies’ desire to put cryptocurrencies, primarily bitcoin, on their balance sheets. Most notably, publicly traded giant MicroStrategy (NASDAQ: MSTR), which has a market capitalization of $2.7 billion, bought up of $250 million worth of bitcoin at the end of 2020 and more than doubled on that position throughout 2021 and 2022. Others have since followed the same trend and have been led by numerous boards and auditors to report on their new, but still volatile assets. under Section 350 of the Accounting Standards Codification (“ASC”). Uncertainty immediately followed as organizations questioned whether accounting for digital assets purchased under the guidance of indefinite-lived intangible assets appropriately valued this emerging asset class.
Companies were – and still are – encouraged to record these assets under ASC 350 at cost, subject to impairment, while disregarding subsequent increases in fair value. Simply put, organizations were instructed to book these assets at their purchase price on the balance sheet whereas only a decline in value less than the original cost of the assets should be recorded as a loss on the income statement! Perversely, increases in price and value had to be ignored in both the balance sheet and the income statement. No wonder public companies are reluctant to touch bitcoin or digital assets. This issue remains, but a potential key change in accounting treatment may be in the works, subject to FASB vote.
Agreed discussions will begin to challenge existing methods of recognition, measurement, presentation and disclosure. Many hope this will lead to the application of ASC 820, alluding to fair value measurement guidelines as a more relevant alternative to ASC 350. It is unclear exactly how ASC 820 will affect accounting digital assets. However, the general concept assumes that a price appreciation would be recognized on the balance sheet at current market value based on the date of the relevant reporting period. Additionally, companies would begin to see benefits on their income statement when an increase in the price of their holdings exceeds the purchase price, representing a gain (increase in net income).
Over the calendar year, we’ve seen bitcoin, the most valuable digital asset in the ecosystem, drop from around $47,000 per token on January 1, 2022 to under $20,000 per token on June 30. 2022, a 56% drop from that. period. Given the highly volatile market bitcoin operates in, does the current accounting method paint an accurate picture of a company’s balance sheet? Do the current guidelines provide investors with the right tools to make smart buying decisions? These are the questions the FASB seeks to answer.
Stay tuned – change is inevitable. Institutional adoption of digital assets may be much closer than it seems.
This is a guest post by Matt Maraia. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.