On December 13, 2023, the Financial Accounting Standards Board (FASB) of the United States issued Accounting Standards Update (ASU) 2023-08: Accounting and Disclosure of Crypto Assets (hereinafter referred to as ASU 2023-08), marking a major change in the accounting treatment of crypto assets under U.S. Generally Accepted Accounting Principles (U.S. GAAP). The standard introduces a fair value measurement model for crypto assets that meet specific criteria to replace the traditional cost-less-impairment model, and requires more detailed disclosures to enhance the transparency and decision-making usefulness of financial statements.
However, in 2024, crypto companies Coinbase and Marathons Digital received regulatory comment letters from the U.S. Securities and Exchange Commission (SEC) for related accounting treatments. This series of events has further amplified the attention of crypto companies and even the entire crypto market to the new accounting standards. Why did these two companies receive SEC comment letters? How do crypto companies deal with the changes in accounting treatment and even SEC supervision brought about by the new accounting standards? This article will briefly analyze the new accounting standards from three aspects: the main content of ASU 2023-08, the reasons for its formulation, and its impact on crypto companies and industries, to help crypto companies cope with the compliance challenges brought about by the changes in the new accounting standards.
1. The main content of ASU 2023-08 accounting standards
ASU 2023-08 accounting standards update is the first special accounting standards update formulated by FASB for crypto assets. The revision of this accounting standard began in 2022, and after many deliberations and extensive solicitation of opinions from stakeholders, it was finally reached and released in 2023. This accounting standard allows companies to record the latest value of crypto assets at market value, marking a major shift in crypto asset accounting from the traditional intangible asset model to the fair value model. The SEC also requires companies to comply with the requirements of Generally Accepted Accounting Principles (US GAAP) when adopting new accounting standards. The following will introduce the main contents of ASU 2023-08 from the aspects of scope of application, fair value measurement, financial statements, effective date, etc.
1.1 Scope of Application
According to the document published by FASB, "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 (Crypto Assets). Applicable assets must meet the following six criteria:
Intangible assets defined in the Accounting Standards Codification (ASC);
Does not provide the holder with enforceable rights or claims to underlying goods, services or other assets;
Created or exists on a distributed ledger based on blockchain or similar technology;
Protected by encryption technology;
Fungible;
Not created or issued by the reporting entity or its affiliates.
The standard clarifies the scope of applicable crypto assets, excludes NFTs, stablecoins and tokens issued by enterprises, ensures that the standard is highly targeted and simplifies accounting treatment.
1.2 Fair value measurement
The original prevailing standard ASC 350 regards crypto assets as indefinite intangible assets and adopts a cost impairment model. In the ASU 2023-08 accounting standard update, crypto assets are measured at their fair value, and the changes in fair value during each reporting period are included in net income and listed in the balance sheet at the end of the period. Fair value measurement reflects the market economic essence of crypto assets, overcomes the limitation of the original prevailing standard that only records impairment losses, and is conducive to simplifying the impairment testing process, reducing costs, and improving the decision-making reference value of financial statements.
1.3 Financial Statement Presentation
According to the accounting standard update ASU 2023-08, the presentation requirements for crypto assets in the following financial statements are as follows:
Balance sheet: Crypto assets need to be presented separately from other intangible assets, which can be further broken down by individual assets or categories.
Income statement: Gains and losses from changes in fair value need to be included in net income and presented separately from changes in the carrying amount of other intangible assets.
Cash flow statement: Crypto assets received as non-cash consideration (such as regular business or donations to non-profit entities) are recorded as operating activities if they are converted into cash almost immediately.
1.4 Disclosure Requirements
ASU 2023-08 Accounting Standards Update requires the following disclosure in annual and interim reports:
Significant holdings: the name, cost basis, fair value and number of units held for each significant crypto asset (determined at fair value); the aggregate fair value and cost basis of insignificant holdings.
Restricted assets: the fair value, nature of the restriction, remaining term and conditions for lifting the restriction of crypto assets subject to contractual sales restrictions.
The following content needs to be exclusively disclosed in the company's annual report:
A summary of the activities of crypto asset holdings from the beginning to the end of the period, including additions, disposals, gains and losses, etc.;
The difference between the disposal price and the cost basis of the disposed assets and a description of related activities;
When gains and losses are not listed separately, explain the income statement item where the gains and losses are located;
The method for determining the cost basis (such as first-in-first-out, specific identification, average cost, etc.).
Overall, the requirements for detailed disclosure and annual exclusive disclosure enhance the transparency and comparability of financial statements, and help improve investors' understanding of the risks, liquidity and management efficiency of crypto assets.
1.5 Effective Date and Transition Requirements
Effective Date: ASU 2023-08 Accounting Standards Update is applicable to fiscal years beginning after December 15, 2024 (including interim periods), and early adoption is allowed (must start from the beginning of the fiscal year containing the interim report).
Transition Requirements: When adopting, the cumulative effect adjustment must be made to the beginning retained earnings (or other appropriate equity or net asset items), and the adjustment amount is the difference between the book value of the crypto asset at the end of the previous fiscal year and the fair value at the beginning of the adoption period.
Given that companies need to make adjustments to the new accounting standards for a certain period of time, FASB has reserved a considerable amount of preparation time for companies and allowed companies to proactively apply them in advance, which is relatively flexible.
1.6 Comparison with International Financial Reporting Standards (IFRS)
International Accounting Standard No. 38: Intangible Assets (IAS 38 for short) defines intangible assets as identifiable non-monetary assets that have no physical form. According to IAS 38, crypto assets held by companies are intangible assets and are initially measured at cost. For subsequent measurement, the cost model or revaluation model can be used: the cost model is generally for crypto assets that lack an active market, and is subsequently measured at cost less accumulated amortization (if applicable) and impairment losses. For crypto assets that are considered to have an indefinite useful life, no amortization is required; the revaluation model is applicable to situations where crypto assets have a reliable fair value in an active market, and changes in fair value are generally recorded in other comprehensive income (OCI) and accumulated in revaluation surplus in equity. If the revaluation results in a decrease in value and exceeds the accumulated revaluation surplus, the difference is recorded in the current period's profit or loss. IAS 38 also stipulates that only one subsequent measurement model can be used for the same type of intangible assets, and no matter which subsequent measurement model is used, impairment testing must be performed at least once a year. IFRS and the updated US GAAP have significant differences in accounting flexibility, scope of application and disclosure requirements. In terms of accounting flexibility, IFRS allows the selection 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, and each fluctuation in the value of an asset in the reporting period is recorded in the current period's net income, and the rule of "once an impairment is recognized, it is irreversible" under the original cost impairment model is no longer applicable. Therefore, companies can record unrealized gains from asset price increases. In terms of scope of application, crypto assets may be considered inventory or intangible assets in IFRS depending on the purpose of holding by the company, while US GAAP clearly limits the scope of application of the fair value measurement model to interchangeable blockchain assets without rights. In addition, IFRS does not have special disclosure requirements for crypto assets, which is also in sharp contrast to US GAAP. 2. Reasons for FASB to launch ASU 2023-08 Looking back on the formulation and release process of the new accounting standards, the new accounting standards are obviously driven by the development of the crypto industry and the regulatory needs of the United States.
2.1 The development of the crypto industry highlights the limitations of old accounting standards
Before the release of ASU 2023-08, US GAAP treated crypto assets as intangible assets and used the cost impairment model for accounting according to ASC 350. This model requires companies to record crypto assets at historical cost and assess whether impairment has occurred in each reporting period, but cannot record the increase in asset value. This treatment stems from the early practice of treating crypto assets as intangible assets such as trademarks or patents. However, the traditional cost impairment model cannot fully reflect the unique economic characteristics of crypto assets. Crypto assets are highly volatile and liquid, and companies can only record impairment losses for declines in value, but cannot record unrealized gains for increases in value, which cannot adapt to the high volatility and liquidity of crypto assets. For example, the price of Bitcoin fell from $69,000 in 2021 to $16,000 in 2022, and then exceeded $100,000 in 2025. The traditional model causes financial statements to be out of touch with market reality, making it difficult for investors to obtain useful information for decision-making.
With the rapid growth of the crypto market, companies such as MicroStrategy and Tesla have increased their investment in crypto assets, and calls for the reform of accounting standards have become increasingly strong. The limitations of the cost impairment model prompted FASB to initiate revisions to better reflect the economic substance of crypto assets.
2.2 The need for national supervision in the United States drives the unification of accounting standards
The emergence of ASU 2023-08 is also driven by the regulatory needs of the US crypto industry. Since the old FASB accounting standards are relatively out of touch with the market, many crypto companies tend to adopt the accounting standards they deem appropriate, and there are significant differences in the classification, measurement and disclosure of crypto assets among different companies, which brings many difficulties to the SEC's supervision. From 2020 to 2023, the SEC had to strengthen the supervision of the crypto market by continuously sending comment letters, conducting enforcement actions, and issuing the SAB 121 announcement (later abolished), which put forward unified requirements for the disclosure of information such as the holdings of crypto assets, custody arrangements, and balance sheets of crypto companies. From the SEC's perspective, unified accounting standards are obviously more conducive to its supervision of US crypto companies, which is also one of the reasons why the SEC participated in promoting changes in accounting standards. 3. Impact of adopting ASU 2023-08 accounting standards 3.1 Impact on crypto companies For crypto 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 standard requires crypto assets to be measured at fair value, which means that the accounting treatment of crypto companies after adopting the new standard will be more unified and transparent, and the financial statements will be closer to 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 corporate performance, so as to make better investment decisions. At the same time, this increase in transparency can also attract more companies to try cryptocurrencies. Companies that have previously been hesitant due to financial reporting inconvenience or investor pressure may accept holding cryptocurrencies and use them as reserve assets. In addition, financial statements disclosed under fair value accounting provide institutional investors with a more reliable information basis, which helps attract more capital into the crypto market. Take Coinbase as an example. It has adopted ASU 2023-08 accounting standards update in 2024. In the 10-K financial statements submitted to the SEC in the third quarter of 2024, the net impairment of crypto assets was split into operating crypto asset income and holding crypto assets, providing investors and regulators with a more detailed income composition in crypto assets, and improving the transparency of financial statements. However, the adoption of ASU 2023-08 accounting standards update may also increase the workload of disclosure preparation. Since fair value measurement makes the financial statements of crypto companies closer to market changes, this means that some companies that invest heavily in crypto assets will usher in greater fluctuations in earnings, shaking investor confidence. Therefore, while proactively disclosing information, companies may also need to adjust their strategies to cope with the impact of increased volatility in financial statements, such as managing investor expectations by disclosing detailed information such as the name of the crypto asset, cost basis, fair value, and restrictive clauses to avoid market misunderstandings caused by volatility; or enhancing investor communication through shareholder letters and earnings conference calls to explain the impact of changes in fair value.
3.1.2 Simplified accounting process
ASU 2023-08 simplifies the accounting process for crypto assets by adopting fair value accounting. Under the old model, companies were required to conduct impairment tests in each reporting period to assess whether crypto assets were below historical cost. This process involved complex valuation techniques and subjective judgments, and was more difficult to value for assets with low trading volumes. In addition, impairment losses are irreversible, and companies cannot adjust them even if the value of the asset subsequently recovers, resulting in cumbersome accounting records. The fair value accounting model omits the impairment test and directly calculates based on market prices or valuation techniques specified in ASC 820. On the one hand, it reduces the resource investment of crypto companies in impairment testing and helps reduce accounting costs; on the other hand, for cryptocurrencies in active markets, their fair value should be determined based on the public quotations of the principal market or the most advantageous market that the company can actually obtain on the measurement date, and the accounting process is more efficient.
3.1.3 Changes in taxes and capital structure
Fair value accounting may have an impact on the tax obligations of crypto companies registered in the United States. According to the provisions of the U.S. Inflation Reduction Act of 2022, large companies' adjusted financial statement income (AFSI) will be subject to a 15% corporate alternative minimum tax (CAMT). Unrealized changes recorded based on fair value accounting may increase the taxable income of crypto companies due to inclusion in AFSI. For example, if a crypto company records an unrealized fair value gain of $50 million in 2025 due to the increase in Bitcoin prices, it may increase the CAMT tax burden by $7.5 million. In terms of capital structure, given the large fluctuations in the market price of cryptocurrencies, the fluctuations in fair value affect the balance sheet and net assets, causing the company's financial statements to show large fluctuations. At this time, it is necessary for companies to take a variety of measures to cope with such fluctuations. On the one hand, the market prices of different cryptocurrencies usually do not rise or fall at the same time, so companies can reduce the overall volatility of crypto assets by holding a combination of multiple cryptocurrencies; on the other hand, companies can also use futures, options and other tools to hedge the impact of changes in the market value of crypto assets. In the long run, ASU 2023-08 may push crypto companies 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 Facing regulatory risks of non-GAAP indicators
The implementation of ASU 2023-08 has prompted the SEC to strengthen its review of non-GAAP indicators. In 2024, crypto companies Coinbase and Marathon Digital received regulatory comment letters from the SEC. In the comment letter, the SEC believes that although it performs accounting treatment in accordance with the ASU 2023-08 accounting standards, the non-GAAP accounting indicators adopted actually exclude the impact of the ASU 2023-08 accounting standards, which is a "tailor-made" indicator that violates the regulations and needs to be corrected. This shows that after adopting the new accounting standards for accounting treatment, if the company attempts to smooth earnings through non-GAAP indicators, it may face higher regulatory risks. Specifically, if crypto companies registered in the United States use non-GAAP indicators for accounting treatment, they must ensure that the indicators comply with the requirements of Item 10(e) of the Federal Reserve's Regulation G and Regulation S-K, which may limit the flexibility of companies in financial reporting and force them to rely more on GAAP indicators to disclose their true financial status. 3.2 Impact on the crypto market 3.2.1 Accelerate regional industry standardization and regulatory coordination The new accounting standards require all crypto assets that meet the standards to be measured at fair value, and provide uniformly disclosed information such as asset name, cost basis, fair value, and number of units held, which establishes a standardized accounting framework for US crypto companies and reduces the diversity of accounting practices and information disclosure between companies. Standardized disclosure is obviously conducive to enhancing the reliability of corporate financial statements and promoting the standardization of industry accounting treatment. The accounting standards update requires companies to disclose detailed information about crypto assets in annual and interim reports, including asset names, cost basis, fair value, number of units held, details of assets subject to contractual restrictions, and reconciliation statements of asset balances at the beginning and end of the period. These disclosure requirements are highly consistent with the SEC's regulatory goals of financial transparency and investor protection, and reduce the burden on the SEC to review the compliance of companies' non-GAAP indicators and the disclosure of crypto 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 crypto asset-related technologies and services. Due to the use of fair value models for valuation, crypto companies need to update valuation tools, analysis methods, and even seek new custody solutions, which provides favorable conditions for the emergence of new blockchain analysis platforms and custody solutions, thereby promoting the development of the crypto technology industry. On-chain data analysis companies or custody service providers such as Chainalysis may usher in certain business growth. At the same time, accounting firms and consulting agencies such as Deloitte and PwC have also provided a series of specialized crypto asset accounting audit services for ASU 2023-08 accounting standards to help companies transition to the new standards and meet compliance challenges. 4. Conclusion The release of ASU 2023-08 is the result of the rapid development of the crypto market and the need for industry standardization. Although in the short term, the volatility brought about by the new accounting standards will become a challenge faced by companies, investors and even policymakers; it has also significantly improved the financial transparency and accounting efficiency of US crypto companies through fair value measurement and detailed disclosure requirements, while providing a unified framework for SEC supervision. Looking at the current crypto market, the accounting treatment and supervision of crypto assets are constantly moving towards standardization and normalization. What impact will the new accounting standards have on the US crypto market? Will it encourage IFRS jurisdictions such as the EU and the UK and emerging crypto markets such as India and Brazil to make adjustments based on the fair value model? Will it help US crypto companies attract more global capital and accelerate industry technological innovation? This remains to be seen.
Weiliang
Miyuki
Weatherly