Is Your Small Business Ready for the New Crypto Reporting Rules?
***DISCLAIMER: This information is for general knowledge and discussion purposes only and does not constitute legal, accounting, tax, or financial advice.***
On December 13, 2023, the Financial Accounting Standards Board (FASB) issued a new standard for crypto assets held by entities, Accounting Standards Update (ASU) 2023-08—INTANGIBLES—GOODWILL AND OTHER—CRYPTO ASSETS .
Note: the Financial Accounting Standards Board (FASB) is an independent, private-sector body that sets up the standards for public and private companies and not-for-profit organizations in the U.S. it is primarily known for developing and improving Generally Accepted Accounting Principles (GAAP), the current standards of accounting and financial statement reporting in the U.S.
Why new accounting standards?
Under the previous standards, crypto assets held by entities were reported like certain other intangible assets which are measured at historical costs minus impairment. But the old measurement did not reflect good information for crypto assets because crypto assets were highly volatile, did not have intrinsic values, and fair market values would reflect more accurate and timely picture of the financial position of an entity holding crypto assets. In response to these issues, FASB has developed the new standards for crypto asset reporting.
The FASB ASU 2023-08 addresses the accounting for and disclosure of crypto assets. Entities with crypto assets are required to measure crypto assets at fair value each reporting period, with changes in fair value recognized in net income.
The FASB ASU 2023-08 2023-08 apply to assets that meet all of the following criteria:
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Meet the definition of intangible assets as defined in the Codification
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Do not provide the asset holder with enforceable rights to or claims on underlying
goods, services, or other assets
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Are created or reside on a distributed ledger based on blockchain or similar
technology
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Are secured through cryptography
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Are fungible
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Are not created or issued by the reporting entity or its related parties.
When should an entity adopt the new standards?
For all entities, the ASU’s amendments are effective for fiscal years beginning after December 15, 2024, including interim periods within those years. Early adoption is permitted. If an entity adopts the amendments in an interim period, it must adopt them as of the beginning of the fiscal year that includes that interim period.
What issues remain concerning the new standards and crypto asset reporting?
While these new standards are a meaningful step forward, challenges for crypto asset reporting remain. The volatile nature of crypto assets presents ongoing valuation challenges. Furthermore, the evolving regulatory landscape may require further adjustments to the accounting guidance in the future.
What action plans should a small business with crypto assets should consider?
Small businesses with crypto holdings should:
(1) Plan for transition : review accounting policies and prepare when and how to implement the new fair value measurement and disclosure requirements accordingly.
(2) Comply : once the timing for implementation is determined, ensure to adjust the accounting policies and procedures for compliance.
(3) Recognize book-tax difference : the new standard will create a new book-tax difference item. It is crucial to work with a tax and accounting professional with adequate knowledge.
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