On Wednesday, December 13th, the Financial Accounting Standards Board (FASB) in the United States released the first accounting rules for cryptocurrencies. According to these rules, companies will need to calculate the fair value of the cryptocurrency they hold and report it in their quarterly and annual financial reports. This new rule allows companies holding cryptocurrencies to record the highs and lows of cryptocurrency, potentially encouraging more companies to choose cryptocurrencies in their investment decisions.
Accounting standards are rules used by U.S. companies (widely applied to internationally listed companies) to establish a common standard for financial-related data statistics. The Financial Accounting Standards Board (FASB) is the body responsible for setting financial accounting and reporting standards in the United States. The standards it sets, known as Generally Accepted Accounting Principles (GAAP), have been widely used in listed companies and many other types of businesses since the 1970s. GAAP is a set of principles, standards, and procedures used to compile and report financial information. These standards provide a common framework for accounting treatment and financial reporting, allowing investors, managers, financial analysts, and other stakeholders to understand and compare financial reports from different companies effectively.
Before the release of these cryptocurrency accounting rules, companies that did not qualify as investment companies (such as Tesla, whose main business is not asset management) defaulted to the practice guidelines of the American Institute of Certified Public Accountants. These guidelines treated cryptocurrencies as intangible assets, a category that includes assets such as trademarks, copyrights, and brands. Unlike cryptocurrencies, these assets are rarely traded.
This treatment means that companies record their tokens at the price they paid for them and permanently write them down when their value falls below the purchase price. However, when the value of cryptocurrency rises, they can not record this part of the profit in the financial report unless they choose to sell cryptocurrency holdings.
Now, companies can measure the fair value of the tokens they hold according to these rules. Since changes in fair value will be recorded in net income, tokens can be included in financial reports at their latest market value, and the appreciation of digital currencies on a company's balance sheet can be recorded in income without being sold. The cryptocurrency industry has requested FASB to establish rules three times since 2017, but the rule-making body has only now confirmed the implementation of new rules.
It is worth noting that FASB intends to set the scope of the new accounting rules relatively narrowly. NFTs are excluded, and stablecoins and tokens created by issuers (such as FTX's FTT issued by the exchange itself) are not covered by these new rules and cannot be recorded in financial reports. Wrapped tokens, such as WBTC, created through bridging, are also not covered by the new rules. FASB members have stated that if these issues become widespread in practice, they are willing to address more cryptocurrency issues in the future.
The new rules will take effect for public and private companies in the fiscal year beginning after December 15, 2024, meaning 2025 for companies with calendar year-end. Companies can choose to follow these rules before the effective date. In other words, during the ongoing bull market, we can see cryptocurrencies recorded at market value in financial reports as early as this year.
The most direct impact of this accounting standard on companies is that public companies will be more likely to start investing in cryptocurrencies. Under the previous accounting standards, the appreciation of cryptocurrency prices could not be recorded in financial reports, while the losses had to be recorded. Essentially, financial reports only recorded bad news about cryptocurrency investments, not good news, which was not good for stock prices closely related to financial reports. Now, companies in an upward cycle are more likely to add cryptocurrencies to their portfolios and can record the appreciation of these assets in their financial reports.
At the same time, investors will find it easier to locate the amount of cryptocurrency held by public companies. According to the new rules, companies need to make a separate entry for their cryptocurrency assets on their balance sheets. They must also disclose significant cryptocurrency holdings and any restrictions on these holdings in footnotes for each reporting period. In annual reports, they will have to reconcile or disclose changes in the opening and closing balances of their cryptocurrency assets, categorized by type.
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