This is an opinion editorial by Matt Maria, a CPA who is looking to help educate the bitcoin community on the ever-changing rules on accounting standards.
As the evolving digital asset ecosystem continues to raise more questions than answers in the accounting sector, members of the Financial Accounting Standards Board (“FASB”) made some important news. On May 11, 2022, the FASB voted in favor of discussing the future on the current dilemma posed by corporate cryptocurrency investments, indicating a potential overhaul to current accounting guidance on digital assets.
This action stemmed from recent developments, including a corporate desire to keep bitcoin, primarily bitcoin, on their balance sheets. Most notably, publicly traded Microstrategy (NASDAQ:MSTR), which has a $2.7 billion market cap, bought $250 million worth of bitcoin in late 2020 and more than doubled that position throughout 2021 and 2022. . Others have since followed the same trend and are guided by several governing boards and auditors alike to account for their new, yet persistently volatile assets under the purview of Accounting Standards Codification (“ASC”) Section 350. has gone. An uncertainty immediately followed as organizations considered whether accounting for purchased digital assets under the umbrella of indefinite intangible guidance appropriately valued this emerging asset class.
Companies were encouraged to – and still do – account for these holdings under ASC 350 on their cost basis, subject to impairment, disregarding subsequent increases in fair value. Simply put, organizations were directed to account for these assets at their purchase price on the balance sheet, while a decrease in value below the initial cost of holdings was to be recognized as a loss on the income statement! Perversely, the increase in value and value had to be ignored on both the balance sheet and the income statement. No wonder public corporations are hesitant to touch bitcoin or digital assets. This issue is ongoing, but a potentially significant change in accounting practice may be in process subject to a FASB vote.
Discussions will begin with consensus on existing methods of recognition, measurement, presentation and disclosure. Many hope that this leads to the application of the ASC 820, pointing to fair-price measurement guidance as a more suitable alternative to the ASC 350. It is unclear how ASC 820 will affect accounting for digital asset holdings. However, the general concept assumes that the increase in value on the balance sheet will be accounted for at the current market price as of the date of the relevant financial statement reporting period. In addition, companies will begin to see a profit on their income statement when the increase in the price of their holdings exceeds the purchase price, which represents a profit (an increase in net income).
Over the course of the calendar year, we saw bitcoin, the most valuable digital asset in the ecosystem, fall from approximately $47,000 per token on January 1, 2022 to less than $20,000 per token on June 30, 2022, a 56% gain on that. period for reduction. Given the highly volatile market with which bitcoin operates, does the current method of accounting provide an accurate picture of a company’s balance sheet? Does current guidance provide investors with the proper tools to make smart buying decisions? These are the questions FASB wants to solve.
Stay tuned – change is inevitable. Institutional adoption of digital assets may be closer than it seems.
This is a guest post by Matt Maria. The opinions expressed are solely their own and do not necessarily represent those of BTC Inc. either . reflect the thoughts of bitcoin magazine,