This piece is an opinion editorial written by Matt Maraia, a Certified Public Accountant who wants to assist in educating the Bitcoin community on the ever-changing regulations on accounting standards.
Members of the Financial Accounting Standards Board (also known as “FASB”) have announced some ground-breaking information at a time when the ecosystem for digital assets is continuing to raise more questions than it does provide answers within the accounting industry. The Financial Accounting Standards Board (FASB) held a vote on May 11, 2022 in favor of holding future discussions on the current challenge presented by corporate cryptocurrency investments. This vote indicates a prospective overhaul to the existing accounting guidelines on digital assets.
This step was taken as a direct result of recent improvements in the willingness of corporations to include cryptocurrency holdings, most notably bitcoin, on their balance sheets. Most notably, the publicly traded behemoth MicroStrategy (NASDAQ: MSTR), which has a market price of $2.7 billion, purchased upwards of $250 million worth of bitcoin in late 2020 and more than doubled down on that position throughout the years 2021 and 2022. Others have since followed the same trend and have been directed by many governing boards and auditors alike to account for their newly discovered assets that are continuously volatile in accordance with the scope of Accounting Standards Codification (“ASC”) Section 350. Others have since followed the same trend. As soon as companies began to consider the possibility of accounting for purchased digital assets under the umbrella of indefinite-lived intangibles guidelines, they were immediately confronted with an uncertainty over the acceptable valuation of this developing asset class.
Companies were urged, and still are encouraged, to account for their holdings under ASC 350 at their cost basis, subject to impairment, while overlooking future rises in fair value. This is despite the fact that later increases in fair value have occurred. To put it another way, businesses were instructed to record these assets on their balance sheets at the price at which they were acquired. However, on the income statement, a loss should only be recognized if the value of the holdings has decreased below the amount that was first paid for them. In a perverse move, it was decided that rises in price and value would not be taken into account on either the balance sheet or the income statement. It’s easy to see why public companies are afraid to become involved with bitcoin or other digital assets. This problem has not been solved, but the Financial Accounting Standards Board (FASB) is considering whether a significant change in accounting treatment should be made.
Discussions that have been prearranged will initiate the process of calling into question the currently utilized techniques of recognition, measurement, presentation, and disclosure. A lot of people are keeping their fingers crossed that this will result in the implementation of ASC 820, which refers to fair-value measurement guidance as a more pertinent alternative to ASC 350. Regarding the precise effects that ASC 820 will have on accounting for digital asset ownership, much remains unknown at this time. However, the overarching idea suggests that a rise in price should be recorded on the balance sheet at the amount that corresponds to its current market value as of the date that corresponds to the reporting period that is relevant to the financial statement. In addition, businesses will start to show positive results on their income statements after the price of their holdings has increased to the point where it has surpassed the original purchase price, which indicates a gain (increase in net income).
Bitcoin, the most digital or electronic asset in the ecological system, experienced a price drop of estimated 56% over the course of a calendar year, falling from approximately $47,000 per token on January 1, 2022 to under $20,000 per token on June 30, 2022. This represents a decrease from the beginning of the year to the end of the year. Does the existing form of financial reporting provide an accurate image of a corporation’s balance sheet, taking into consideration the highly volatile market in which bitcoin operates? Does the existing guidance provide investors with the appropriate tools to help them make astute decisions on their purchases? The Financial Accounting Standards Board is looking for answers to these issues.
Maintain vigilance because transformation is unavoidable. It’s possible that institutional adoption of digital assets is much closer than it seems to be right now.
This is a contribution from a reader named Matt Maraia. All of the opinions expressed here are completely the authors’, and in no way do they represent BTC Inc. or Bitcoin Magazine’s positions.