Forward the original title “What Challenges Do Updates to US Encryption Accounting Standards Bring? FinTax Encryption Accounting and Audit Special Topic (Part Four)”

On December 13, 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-08: Accounting and Disclosure for Crypto Assets (hereinafter referred to as ASU 2023-08), marking a significant change in the accounting treatment of crypto assets under U.S. Generally Accepted Accounting Principles (U.S. GAAP). This standard introduces a fair value measurement model for crypto assets that meet specific criteria, replacing the traditional cost-less-impairment model, and requires more detailed disclosures to enhance the transparency of financial statements and the usefulness of decision-making.

However, in 2024, cryptocurrency companies Coinbase and Marathon Digital received regulatory comment letters from the U.S. Securities and Exchange Commission (SEC) due to related accounting treatments. This series of events has further amplified the attention that cryptocurrency companies and the entire cryptocurrency market are paying to the new accounting standards. Why did these two companies receive SEC comment letters? How are cryptocurrency companies responding to the changes in accounting treatments and SEC regulations brought about by the new accounting standards? This article will provide a brief analysis of the new accounting standards from three aspects: the main content of ASU 2023-08, the reasons for its formulation, and its impact on cryptocurrency companies and the industry, helping cryptocurrency companies tackle the compliance challenges posed by the changes in the new accounting standards.

1. The main content of ASU 2023-08 accounting standards

ASU 2023-08 is the first specialized accounting standards update from FASB regarding encryption assets. The revision of this accounting standard began in 2022, going through multiple reviews and extensive consultations with stakeholders, ultimately reaching a consensus and being published in 2023. This accounting standard allows companies to record the latest value of encryption assets at market value, marking a significant shift in encryption asset accounting from the traditional intangible asset model to a fair value model. The SEC also requires that companies must comply with the requirements of Generally Accepted Accounting Principles (US GAAP) when adopting the new accounting standards. The following will introduce the main contents of this accounting standard from the aspects of the scope of ASU 2023-08, fair value measurement, financial statements, effective date, etc.

1.1 Scope of Application

According to the document published by FASB titled “Intangibles-Goodwill and Other-Crypto Assets (Subtopic 350-60): Accounting and Disclosure of Crypto Assets (Accounting Standards Update No. 2023-08),” ASU 2023-08 applies to all entities holding specific crypto assets. The applicable assets must meet the following six criteria:

Intangible assets defined by the Accounting Standards Codification (ASC);

Does not provide holders with any enforceable rights or claims to the underlying goods, services, or other assets;

Creation or existence of distributed ledgers based on blockchain or similar technologies;

Protect through encryption technology;

fungible;

Not created or issued by the reporting entity or its affiliates.

This standard clarifies the applicable scope of encryption assets, excluding NFTs, stablecoins, and tokens issued by enterprises, ensuring that the guidelines are highly targeted and simplifying accounting treatment.

1.2 Fair Value Measurement

The existing accounting standard ASC 350 treats encryption assets as indefinite intangible assets, using a cost impairment model. In the ASU 2023-08 accounting standards update, encryption assets are measured at their fair value, and changes in fair value during each reporting period are recognized in net income, reported at the end of the period on the balance sheet. Fair value measurement reflects the economic substance of encryption assets in the market, overcoming the limitations of the existing standard that only records impairment losses, which helps simplify the impairment testing process, reduce costs, and enhance the decision-making reference value of financial statements.

1.3 Financial Statement Presentation

According to the ASU 2023-08 accounting standards update, the reporting requirements for encryption assets in the following financial statements are as follows:

Balance Sheet: Encryption assets should be listed separately from other intangible assets and can be further subdivided by individual asset or category.

Income Statement: Gains and losses from changes in fair value must be included in net income and presented separately from changes in the carrying amount of other intangible assets.

Cash Flow Statement: As non-cash consideration (such as regular business or non-profit entity donations) received encryption assets, if they are almost immediately converted into cash, the related cash inflows are listed as operating activities.

1.4 Disclosure Requirements

ASU 2023-08 accounting standard update requires the disclosure of the following information in annual and interim reports:

Important holdings: the name, cost basis, fair value, and number of units held for each important encryption asset (determined by fair value); the total fair value and cost basis of non-important holdings.

Restricted assets: The fair value, nature of restrictions, remaining term, and conditions for the release of encryption assets subject to contractual sales restrictions.

The following content needs to be disclosed exclusively in the annual report of the company:

Summary table of activities from the beginning to the end of the holding period of encryption assets, including additions, disposals, gains and losses, etc.;

The disposal price of the disposed assets and the difference from the cost basis, along with a description of related activities;

When gains and losses are not separately stated, indicate the item in the income statement where the gains and losses are located.

Methods for determining cost basis (such as first-in, first-out, specific identification, average cost, etc.).

Overall, the requirements for detailed disclosures and annual exclusive disclosures enhance the transparency and comparability of financial statements, helping to improve investors’ understanding of the risks, liquidity, and management efficiency of encryption assets.

1.5 Effective Date and Transitional Requirements

Effective Date: ASU 2023-08 accounting standards update applies to fiscal years beginning after December 15, 2024 (including interim periods within), and early adoption is allowed (starting from the fiscal year that includes the interim report).

Transition Requirements: When adopting, it is necessary to make cumulative effect adjustments to the beginning retained earnings (or other appropriate equity or net asset items), with the adjustment amount being the difference between the book value of the encryption assets at the end of the previous fiscal year and the fair value at the beginning of the current period.

In view of the need for companies to make adjustments according to the new accounting standards for a certain period of time, the FASB has reserved a relatively ample preparation time for companies and allows them to proactively adopt the standards in advance, which can be considered relatively flexible.

1.6 Comparison with International Financial Reporting Standards (IFRS)

International Accounting Standard 38: Intangible Assets (abbreviated as IAS 38) defines intangible assets as identifiable non-monetary assets without physical substance. According to IAS 38, the encryption assets held by an enterprise are classified as intangible assets and are initially measured at cost. For subsequent measurement, either the cost model or the revaluation model can be adopted: the cost model generally applies to encryption assets that lack an active market, with subsequent measurement based on cost less accumulated amortization (if applicable) and impairment losses. Encryption assets considered to have an indefinite useful life do not need to be amortized; the revaluation model applies when encryption assets have a reliably measurable fair value in an active market, with fair value changes typically recognized in other comprehensive income (OCI) and accumulated in revaluation surplus within equity. If the revaluation results in a decrease in value that exceeds the accumulated revaluation surplus, the difference is recognized in profit or loss for the period. IAS 38 also stipulates that only one subsequent measurement model can be used for the same class of intangible assets, and regardless of which subsequent measurement model is adopted, an impairment test must be performed at least once a year.

There are significant differences between IFRS and the updated US GAAP in terms of flexibility in accounting treatment, scope of application, and disclosure requirements. In terms of flexibility in accounting treatment, IFRS allows the choice of a revaluation model, and impairment losses can be reversed to the latest estimated recoverable amount when appropriate; in contrast, the updated US GAAP adopts a fair value measurement model, where fluctuations in asset value during each reporting period are recognized in the current net income, and the rule under the original cost impairment model that “once impairment is recognized, it cannot be reversed” is no longer applicable. Therefore, companies can record unrealized gains from asset price increases. Regarding the scope of application, cryptocurrency assets under IFRS may be classified as inventory or intangible assets depending on the purpose for which the company holds them, while US GAAP clearly limits the scope of the fair value measurement model to interchangeable, non-rights blockchain assets. Additionally, IFRS does not have specific disclosure requirements for cryptocurrency assets, which contrasts sharply with US GAAP.

2. The reason FASB issued ASU 2023-08

Reviewing the formulation and release process of the new accounting standards, the new accounting standards are clearly driven by the dual factors of the development situation of the encryption industry and the regulatory needs of the United States.

2.1 The development of the encryption industry highlights the limitations of existing accounting standards.

Before the release of ASU 2023-08, US GAAP treated encryption assets as intangible assets, applying the cost impairment model as per ASC 350 for accounting purposes. This model requires companies to record encryption assets at historical cost and assess whether impairment has occurred at each reporting period, but does not allow for the recording of asset value increases. This treatment stems from the early view of encryption assets being similar to intangible assets like trademarks or patents. However, the traditional cost impairment model fails to adequately reflect the unique economic characteristics of encryption assets. Encryption assets are highly volatile and liquid, allowing companies to only record impairment losses for value declines, but not unrealized gains for value increases, which does not accommodate the high volatility and liquidity of encryption assets. For example, the price of Bitcoin fell from $69,000 in 2021 to $16,000 in 2022, and then surpassed $100,000 in 2025. The traditional model leads to a disconnect between financial statements and market realities, making it difficult for investors to obtain useful information for decision-making.

With the rapid growth of the encryption market, companies like MicroStrategy and Tesla are increasing their investments in encryption assets, and the call for reforming accounting standards is becoming increasingly strong. The limitations of the cost impairment model have prompted the FASB to initiate revisions to better reflect the economic substance of encryption assets.

2.2 The demand for national regulation in the United States drives the unification of accounting standards

The emergence of ASU 2023-08 is also driven by the regulatory demands of the U.S. encryption industry. Due to the disconnection between the old FASB accounting standards and the market, many encryption companies tend to adopt accounting standards they deem appropriate, and there are significant differences in the classification, measurement, and disclosure of encryption assets among different companies, which brings many challenges to SEC regulation. From 2020 to 2023, the SEC had to strengthen its regulation of the encryption market through continuous comment letters, enforcement actions, and other means, and issued the SAB 121 announcement (which was later revoked), which proposed unified requirements for the disclosure of information regarding the encryption asset holdings, custody arrangements, balance sheets, etc. of encryption companies. From the SEC’s perspective, a unified accounting standard is clearly more beneficial for its regulatory work concerning U.S. encryption companies, and this is also one of the motivations for the SEC’s involvement in facilitating changes to accounting standards.

3. The impact of adopting ASU 2023-08 accounting standards

3.1 Impact on encryption companies

For encryption companies, adopting ASU 2023-08 as an accounting standard for accounting treatment may have the following impacts:

3.1.1 Improve the transparency of financial statements

The new guidelines require that encryption assets be measured at fair value, which means that the accounting treatment for encryption enterprises after adopting the new guidelines will be more unified and transparent, with financial statements more closely aligned with market changes. More transparent financial statements not only provide management with more accurate asset value data but also help investors have a clearer judgment on the company’s performance, thereby making better investment decisions. At the same time, this increase in transparency can attract more enterprises to try cryptocurrency. Those enterprises that have previously hesitated due to inconvenient financial reporting or pressure from investors may take this opportunity to accept holding cryptocurrency and view it as a reserve asset. Additionally, the financial statements disclosed under fair value accounting provide institutional investors with a more reliable information foundation, helping to attract more capital into the encryption market. Taking Coinbase as an example, it has adopted ASU 2023-08 accounting standards updates in 2024, and in the 10-K financial statement submitted to the SEC in the third quarter of 2024, it separated the net impairment of encryption assets into operational encryption asset income and held encryption assets, providing investors and regulators with a more detailed composition of income in encryption assets, thereby enhancing the transparency of financial statements.

However, the adoption of ASU 2023-08 accounting standards updates may also increase the workload for disclosure preparation. Since fair value measurement brings the financial statements of encryption companies closer to market changes, this means that some companies with significant investments in encryption assets will experience greater fluctuations in earnings, shaking investor confidence. Therefore, while companies actively disclose information, they may also need to adjust strategies to cope with the impact of increased volatility in financial statements, such as by providing detailed disclosures of encryption asset names, cost basis, fair value, restrictive clauses, etc., to manage investor expectations and avoid market misunderstandings caused by volatility; or enhancing investor communication through shareholder letters and earnings conference calls to explain the impact of fair value changes.

3.1.2 Simplified Accounting Processing Flow

ASU 2023-08 simplifies the accounting treatment of encryption assets by adopting fair value accounting. Under the old model, enterprises were required to conduct impairment tests for each reporting period to assess whether the encryption assets were below historical cost, a process that involved complex valuation techniques and subjective judgments, making it even more difficult to value assets with low trading volumes. Additionally, impairment losses are irreversible; even if the asset value subsequently recovers, enterprises cannot make adjustments, leading to cumbersome accounting records. The fair value accounting model eliminates the impairment testing phase and is based directly on market prices or valuation techniques prescribed by ASC 820. On one hand, this reduces the resource investment of encryption enterprises in impairment testing, helping to lower accounting costs; on the other hand, for actively traded cryptocurrencies, their fair value should be determined based on the publicly available quotes from the principal market or the most advantageous market that the enterprise can actually obtain on the measurement date, making the accounting process more efficient.

3.1.3 Change in Taxation and Capital Structure

Fair value accounting may have implications for the tax obligations of crypto companies registered in the U.S. According to the U.S. Inflation Reduction Act of 2022, large corporations’ Adjusted Financial Statement Income (AFSI) will be subject to a 15% Corporate Alternative Minimum Tax (CAMT). Unrealized gains recorded based on fair value accounting may increase the taxable income of crypto companies due to their inclusion in AFSI. For example, if a crypto company records an unrealized fair value gain of $50 million due to a rise in Bitcoin prices in 2025, this could increase its CAMT liability by $7.5 million.

In terms of capital structure, given the large fluctuations in the market prices of cryptocurrencies, fair value volatility affects the balance sheet and net assets, resulting in significant fluctuations in corporate financial statements. At this point, it is necessary for enterprises to take various measures to cope with such fluctuations. On one hand, the market prices of different cryptocurrencies usually do not rise and fall simultaneously, so enterprises can reduce the overall volatility of crypto assets by holding a diversified portfolio of cryptocurrencies; on the other hand, enterprises can also use tools such as futures and options to hedge against the impact of changes in the market value of crypto assets. In the long run, ASU 2023-08 may prompt crypto enterprises to pay more attention to capital management and tax planning to adapt to the volatility and regulatory requirements brought about by fair value accounting.

3.1.4 Regulatory risks associated with non-GAAP metrics

The implementation of ASU 2023-08 has prompted the SEC to strengthen its scrutiny of non-GAAP metrics. In 2024, cryptocurrency companies Coinbase and Marathon Digital received regulatory comment letters from the SEC. In the comment letters, the SEC stated that although they were accounting for matters under ASU 2023-08 accounting standards, the non-GAAP accounting metrics they adopted effectively excluded the influence of ASU 2023-08 accounting standards, constituting a violation of “tailored” metrics that need to be corrected. This indicates that after adopting new accounting standards, if a company attempts to smooth earnings through non-GAAP metrics, it may face higher regulatory risks. Specifically, cryptocurrency companies registered in the U.S. that use non-GAAP metrics for accounting must ensure that the metrics comply with the requirements of the Federal Reserve’s Regulation G and Regulation S-K Section 10(e), which may limit the company’s flexibility in financial reporting and force it to rely more on GAAP metrics to disclose its true financial condition.

3.2 Impact on the encryption market

3.2.1 Accelerate regional industry standardization and regulatory coordination

The new accounting standards require all eligible encryption assets to be measured at fair value, while providing standardized disclosure information such as asset name, cost basis, fair value, and quantity held. This establishes a standardized accounting framework for US encryption enterprises and reduces the diversity in accounting practices and inter-company information disclosure. Standardized disclosure clearly benefits the reliability of corporate financial statements and promotes the normalization of industry accounting practices. The updates to the accounting standards require enterprises to disclose detailed information about encryption assets in their annual and interim reports, including asset name, cost basis, fair value, quantity held, details of contract-restricted assets, and a reconciliation statement of asset balances from the beginning to the end of the period. These disclosure requirements align closely with the SEC’s regulatory goals for financial transparency and investor protection, significantly alleviating the burden on the SEC in reviewing compliance with non-GAAP measures and the disclosure of encryption asset risks.

3.2.2 Promote the growth of demand for corresponding accounting technologies and services

The implementation of ASU 2023-08 accounting standards updates may stimulate demand for technologies and services related to encryption assets. Due to the adoption of fair value models for valuation, encryption enterprises need to update their valuation tools and analysis methods internally, and even seek new custody solutions. This creates favorable conditions for the emergence of new blockchain analysis platforms and custody solutions, thereby promoting the development of the encryption technology industry. On-chain data analysis companies like Chainalysis or custody service providers may experience some business growth as a result. At the same time, accounting firms and consulting agencies like Deloitte and PwC have already provided a series of specialized accounting audit services for encryption assets in response to ASU 2023-08 accounting standards, helping enterprises transition to the new standards and tackle compliance challenges.

4. Conclusion

The release of ASU 2023-08 is a result of the rapid development of the encryption market and the need for industry standardization. Although in the short term, the volatility issues brought by the new accounting standards will become a challenge faced by enterprises, investors, and even policymakers; it significantly enhances the financial transparency and accounting efficiency of American encryption companies through fair value measurement and detailed disclosure requirements, while providing a unified framework for SEC regulation. Looking at the current encryption market, the accounting treatment and regulation of encryption assets are continuously moving towards standardization and normalization. What further impacts the new accounting standards will have on the American encryption market, whether they will motivate IFRS jurisdictions like the EU and the UK, as well as emerging encryption markets like India and Brazil, to adjust their fair value models, and whether they can help American encryption companies attract more global capital and accelerate industry technological innovation, still requires ongoing observation.

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