 |
Get all the essential market news and expert opinions in one place with our daily newsletter. Receive a comprehensive recap of the day’s top stories directly to your inbox. Sign up here! |
(Kitco News) – The U.S. Financial Accounting Standards Board (FASB), the organization responsible for establishing accounting and reporting standards for organizations that follow generally accepted accounting principles (GAAP), has unanimously approved rules for valuing crypto assets in company financial statements.
Under new rules, companies that hold or invest in cryptocurrency will be required to report their holdings at fair value, a measurement that aims to capture the most up-to-date value of an asset.
FASB first announced the proposed changes back in March and issued a call for public comments on the changes to the FASB Accounting Standards Codification.
The organization held a board meeting on Wednesday to discuss the feedback received on the proposed accounting standards update, and the board members ultimately approved the changes. The new rules will go into effect in 2025.
Based on the updated standards, fair value is the estimated price of an asset that takes into account current market value and other decisive elements.
Previously, companies were required to keep impairment losses from crypto on their balance sheets even after the digital asset regained its value, meaning their balance sheets no longer reflected the true value of their crypto holdings.
While the new accounting method is expected to increase volatility in the earnings of companies with large crypto holdings, it will also allow them to record financial recoveries from increasing crypto prices to better reflect the state of their treasuries.
“It’s not very often that we can both take cost out of the system and improve the decision usefulness of information, and it makes it a really easy vote to do both of those,” FASB member Christine Botosan said.
Despite the rules not taking effect until 2025, FASB said that companies can begin using fair-value accounting for their crypto immediately if they so choose.
Crypto-native companies like Coinbase will be most affected by the rule change, along with investment firms and companies like MicroStrategy and Tesla that hold large amounts of crypto on their books.
“Fair value accounting is coming to Bitcoin (BTC),” MicroStrategy chair Michael Saylor tweeted in response to the ruling. “This upgrade to FASB accounting rules eliminates a major impediment to corporate adoption of $BTC as a treasury asset.”
Hedge fund manager James Lavish agreed that “This is a huge development for Bitcoin,” and provided a simplified explanation of the ruling.
“The latest FASB vote opens the door for companies to buy and hold Bitcoin in corporate treasuries without balance sheet penalties,” Lavish said. “FASB originally determined that Bitcoin was to be considered a ‘long-lived intangible asset,’ much like a patent, copyright, or trademark. This creates a problem when the asset is accounted for on a company’s balance sheet,” because “it’s actually a liquid asset that trades on exchanges globally.”
“Going forward, if a company buys Bitcoin, they will use a recognized exchange *market value* to price the asset every quarter, just like a stock, bond or commodity that trades on a public exchange,” he said. “Bitcoin goes up, it can be recognized. Bitcoin goes down, it is accounted for. Bitcoin recovers, it is recognized. With this ruling, it is most likely that any profits or losses will then flow through to the income statement and be recognized, too. Another important feature.”
Mark Palmer, senior equity research analyst at Berenberg Capital, also agreed that this rule change will greatly benefit companies like MicroStrategy and could lead to a significant increase in the price of Bitcoin.
“The change should help MicroStrategy and other companies that hold digital assets to eliminate the poor optics that have been created by impairment losses under the rules that the FASB has had in place,” Palmer said. “A change in the accounting treatment would be a significant positive catalyst for the price of Bitcoin, as it would spur adoption by tech companies.”
Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.
