The Financial Accounting Standards Board has laid down new rules that demand companies, such as MicroStrategy and Tesla, to provide a detailed account of their cryptocurrency holdings.
The changes, effective from fiscal years starting after December 15, 2024, come with a set of important updates.
Until now, cryptocurrency assets were considered indefinite-lived intangible assets under Generally Accepted Accounting Principles (GAAP).
Annual tests for impairment were a norm, with more frequent evaluations triggered by events hinting at potential issues.
If the asset’s carrying amount exceeded its fair value, recognition of an impairment loss and adjustment to fair value were obligatory.
Post-impairment, any increase in carrying amount and reversal of impairment loss were strictly prohibited.
The recent amendments change this landscape.
Entities are now required to measure crypto assets at fair value in their financial statements each reporting period. Any changes resulting from this remeasurement are reflected in the net income.
Additionally, companies must now provide enhanced disclosures during both annual and interim reporting periods.
The goal is to arm investors with vital information, enabling them to analyze and assess the exposure and risk tied to significant individual crypto asset holdings.
The update also introduces fair value measurement, aligning accounting practices for crypto asset holders with those under specific industry guidelines, such as investment companies.
This alignment eliminates the need to conduct impairment tests, reducing both costs and complexities associated with the previous guidance.
For companies considering early adoption, the changes are permissible for both interim and annual financial statements that are yet to be issued.
However, if adopted in an interim period, these rules must be applied from the start of the fiscal year that includes that interim period.
These changes will also require a cumulative-effect adjustment to the opening balance of retained earnings or other equity components at the beginning of the annual reporting period in which the amendments are adopted.