Financial reporting standards have a positive impact on the business environment and corporate markets by increasing consistency, transparency, and accountability.

Traditionally, the main trendsetters in this domain were the US Generally Accepted Accounting Principles (US GAAP) published by the Financial Accounting Standards Board (FASB) and International Financial Reporting Standards published by London-based IASB. While US GAAP has always been regarded as the most comprehensive source of detailed, case-by-case reporting and disclosure instructions, IFRS has, in the last years, developed into a truly global, principle-based rule book.

Both organizations have addressed crypto and digital assets at different stages and continue to develop the corresponding accounting and reporting treatment.

IFRS view on crypto-assets

In 2019 IASB issued an 'interpretation' for 'cryptocurrency holdings' to be applied in IFRS. Cryptocurrency is just a subset of crypto-assets in IASB terminology, yet it provided some understanding of the accounting specialists' view on the subject.

Similar to regulatory bodies, the accounting rule setters faced the challenge of classification of the crypto-assets, since no universal taxonomy exists for them and some subjects display characteristics of multiple categories of assets.

Connected with the issue of classification, is the measurement or valuation of the crypto-assets. There are multiple methods to measure and disclose the value of the assets on your books such as at fair value or at the cost.

To cut short the details in IFRS interpretation for cryptocurrencies, the current position is to classify them as inventory or as intangible assets. The first standard is used to report assets that are traded in the normal course of business. In the cryptocurrency case, examples of such enterprises can be brokers and crypto-traders. The second standard would apply to the rest of the entities such as banks, commercial firms, and funds.

In both cases, the accounting rule prescribes prudency in the valuation of the assets. In the case of inventory, it is the lower of the acquisition cost or net realizable value (cost model), unless the broker-trader holds it to generate profits from fluctuations in price, in which case they are marked to market (fair value model)

In the case of intangible asset classification, the crypto-asset cost can be carried at the acquisition cost less any impairment adjustment (cost model), or, if there is an active market, be marked to that price (revaluation model).

There is a discussion about the possible future classification of some crypto-assets as cash instruments, financial contracts, etc. but these cases are currently limited and not covered by most of the guidebooks.

US GAAP view on crypto-assets

In March this year, FASB issued a proposal for its crypto-asset accounting standard update titled "Intangibles — Goodwill and Other — Crypto Assets: Accounting for and Disclosure of Crypto Assets".

Similar to IFRS, GAAP was requiring accounting for the crypto-asset as either inventory (for broker-traders) or an intangible asset. Since the traditional valuation model for intangible assets was not correctly representing the economics of the crypto-assets, FASB's proposal is to measure crypto assets at fair value.

Under both IFRS and US GAAP, fair value is defined the same: “Fair value is the price that would be received for the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date"

Under the new guidance, crypto assets will be presented separately from other intangible assets on the balance sheet, at fair value, with any changes in the fair value recorded in the income statement.

An entity would be required to subsequently measure crypto assets that meet those criteria at fair value with changes recognized in net income each reporting period.

FASB acknowledged in its discussion paper that some companies could be concerned about net income volatility that could result from presenting fair value changes in net income. However, they believe that the benefits derived from holding a crypto asset are similar to those derived from holding equity securities for which the changes are also recognized in the income statement.

The FASB proposal also requires companies to disclose more information about their significant holdings of cryptocurrencies, including any restrictions on and changes in those holdings. In certain cases, such as in accounting for mining rewards that are immediately encashed, crypto-assets receipts should be reported in operating cash inflows – something standard setters always wanted to avoid before.

The accounting guidance of both IFRS and US GAAP applies to the fungible class of crypto assets and does not provide the asset holder any claims on underlying goods, services, or other assets. Accordingly, NFT and stablecoins do not qualify for the accounting treatment under these standards.

For NFTs, the standards prescribe a case-by-case identification of rights and obligations and, then, application of rules that exist for non-NFT arrangements made for such rights and obligations.

For stablecoins, depending on the redeemability conditions, the accountants should either apply the standards for the financial instruments or, classify them as intangible assets or inventory, like the other crypto-assets.

If the development of the accounting rules correctly reflects the area of business activities of the institutional investors in the crypto industry, then one can conclude that most of these activities are currently concentrated in speculative trading and custody.

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