Dive Brief:

• The Financial Accounting Standards Board (FASB) reached a tentative decision at a meeting Wednesday to make fair value the primary accounting method for measuring crypto assets.

• The move comes after the U.S. accounting standards setter heard from an “overwhelming majority” of stakeholders who favored a shift to fair value from the current practice that has generally been interpreted to mean that crypto assets “should be impaired to the lowest observable fair value within a reporting period,” according to FASB meeting materials.

• “Given how these assets generate huge cash flows and the type of cash flows they generate, I feel strongly that fair value is in fact the relevant measurement basis, it’s the right measurement basis, and it better captures the economics of this type of asset,” Board Member Christine Ann Botosan said on a YouTube video of the meeting.

Dive Insight:

The board’s decision Wednesday comes at an extraordinarily difficult time for crypto companies and investors. Nasdaq Crypto Index has fallen 63% to about 1,09SU this year to date as of this morning, outpacing the decline in the S&P 500 which dropped 26% to about 3543 over the same period. 

Since reversing course to prioritize crypto in May, the FASB appears to be gaining momentum on addressing the hot topic. In August, FASB narrowed the scope of the type of assets it will address to leave out nonfungible tokens (NFTs).  

This week’s decision marks a big step toward providing an answer and a “quick fix” to the relatively narrow fair value question that stakeholders have been clamoring for. Many stakeholders have been critical of the current accounting practice, which generally treats cryptocurrency as an intangible asset rather than allowing it to be held at fair value. 

That means under that system a firm that holds bitcoin or another digital asset that goes down in value reflects that drop in its reports but does not do the same if the value rises.  

Among those calling for the change was Grayscale Investments CFO Ed McGee who said he wanted the FASB to provide a stopgap quick fix by approving the fair value use approach ahead of taking up the broader aspects of crypto accounting.  

The FASB should “allow corporate enterprises to elect fair value. I think that would solve a lot and would not require as much time and effort from a FASB perspective,” he told CFO Dive in May.

At the meeting Wednesday the board unanimously chose the fair value approach, rejecting two alternatives proposed by the company staff that includes a historical cost approach with simplified impairment and a net realizable value (NRV). 

Looking ahead, the board appears to be setting standards principally intended to apply to digital assets like bitcoin and ether, according to a KPMG report Wednesday. But they are also intended to capture many other lesser-known digital currencies. 

During the meeting the board also pushed back against the guidance being an option rather than a requirement as well as against differentiation of the guidance provided to private companies.

The board was also mindful of the impact of crypto on investors and hinted at the beat-down the value of crypto has taken this past year. 

“At the end of the day there’s a broad range of these assets, different levels of liquidity but highly volatile speculative, thinly-traded assets that have certain attributes to them…but people hopefully go in with their eyes wide open and understand what they have,” FASB Chair Richard Jones said. 

The high-profile nature of cryptocurrency issue and its popularity with retail investors has in some ways put the FASB in new territory. “I will admit there’s probably a lot of people...that had never heard of the FASB before and I joked that probably the only time the FASB ever trended on social media was related to crypto,” Jones told CFO Dive in a July interview.