New US accounting standards published last week by the Financial Accounting Standards Board (FASB) could spur some companies to add crypto to their balance sheets, but it’s unlikely to result in a dramatic shift in corporate treasury strategies, accountants from major consultancies told Unchained.
“You’ll see some companies who hesitated or kept it in a very small amount on their balance sheet be able to become a little more free with it and add it to their balance sheet in a more meaningful way,” said Tony Tuths, digital asset tax practice leader at professional services firm KPMG and principal within the firm’s alternative investment tax practice.
Challenges around accounting for crypto assets have arisen as large, US publicly traded companies, including Tesla, Microstrategy and Block, have plunged into buying bitcoin (BTC) in the last bull cycle.
Digital assets were held on the balance sheet at cost, which accounted for losses but not gains creating a “strange effect” where assets could be worth far much more than what was on the balance sheet, Tuths said.
The new guidance from FASB, the standard-setting body behind Generally Accepted Accounting Principles (GAAP) followed by US firms, requires companies holding bitcoin and other cryptocurrencies to record these assets at fair value, which is based on measuring the tokens’ most current value. This change will permit companies to record profits rather than just losses.
“[It’s] incredibly helpful in the sense that companies now won’t have this hesitation,” KPMG’s Tuths said.
Corporates Hold Back on HODLing
Yet Austin Campbell, founder and managing partner of Zero Knowledge Consulting and adjunct professor at Columbia Business School, wrote in an email to Unchained that “a giant sea change” in adoption is unlikely. The standard is a “net positive” that will “marginally help” more companies hold crypto on their balance sheets, especially corporate treasuries wanting to dabble in small parts of it for their allocations, he added.
Carmel King, a director at professional services firm Grant Thornton UK LLP, also doesn’t expect mainstream usage to rise immediately for three reasons: the volatility of the asset class, the lack of global regulatory clarity and a lingering perception of crypto’s criminality.
“I’m confident that milestones such as the FASB rule change and improved regularity clarity will shift perceptions, but it will take a little time,” King said in an email to Unchained.
Crypto native and payment firms are among the companies already holding digital assets on their balance sheets. When those firms disagreed with the “at cost” measurement approach, they would usually provide additional disclosures noting fair value, said Marek Walendowski, partner within the EMEIA financial services division at professional services firm EY.
“I have never seen the accounting rules holding anyone back from investing in crypto assets if they genuinely believed in that,” Walendowski said, adding that by requiring more disclosures, the standards will ensure more transparency into corporate crypto holdings.”
Intricacies of Fair Value
The new standard will take effect Dec. 15, 2024, although companies can adopt them sooner. Those firms following US GAAP accounting principles must report cryptoassets at fair value rather than at cost – a change that not all companies welcome.
Generally, non-investment companies won’t use fair value to measure intangibles because of their volatility, said KPMG’s Tuths. Crypto is a unique case where firms would rather deal with the volatility that comes with fair value than misrepresent the balance sheet by only measuring losses, he added.
EY’s Walendowski said that some companies who hold crypto for the long term may find the fair value measurement method not fully reflective of performance.
Financial services firms with payments businesses may be among the new crypto adopters as expanding payments into digital assets will become easier, Tuths said. The potential approval of a US spot bitcoin ETF, which analysts predict could happen as early as January, could also change the dynamic for regulated financial services firms. Once bitcoin is within an ETF wrapper, it becomes a security and allows regulated entities who can’t hold cryptocurrencies but can hold securities to gain exposure, Tuths said.
“A spot bitcoin ETF is an easy concept for companies to grasp, whilst avoiding such complications specific to cryptoassets as custodianship,” said Grant Thornton’s King. Custodianship presents challenges because of contradictory guidance from GAAP and the SEC.
Despite these challenges, and although some cryptoassets fall outside the scope of the FASB guidance, the reaction to the announcement has been largely favorable with MicroStrategy Chair and bitcoin advocate Michael Saylor praising them in a tweet on the social media platform X.
In an email to Unchained, Salman Khan, chief financial officer at Marathon Digital Holdings, wrote that “the fair valuation model will allow investors to make better decisions to invest and open up a larger investor base such as corporations, family offices and other institutional investors. He added: “This development puts bitcoin on a level playing field with other investment opportunities like equities, bonds and gold.”
