Key takeaways:
Panelists:
Following the FASB’s ASU 2023-08, entities can now account for cryptoassets at fair value, rather than impairment. Many crypto enterprises have been tracking assets at fair value for some time now. However, challenges around fair value measurement remain.
David highlighted that ASU 2023-08 not only requires fair value measurement but also ensuring the expected disclosures have been made. He underscored the critical need for a detailed approach:
“It’s not just reporting certain assets at fair value. It also includes a number of disclosures... it’s super easy to grab an aggregated average from one of these sites that have a lot of assets... but that’s not GAAP; GAAP is identifying your principal market, and it’s often a token-by-token analysis.”
Pulling generic price averages from external sources is no longer sufficient. Accurate reporting now depends on deep, asset-specific data, which is especially difficult when working with less liquid or niche digital assets, which often lack clear market valuation.
Jason echoed that selecting a principal market is a challenge, especially for large volumes of digital assets.
This underscores the importance of identifying the right market for each asset to ensure compliance with fair value measurement standards. David also cautioned against undervaluing assets, warning that a conservative approach can be just as problematic:
“You might want to engage a specialist just to see if you're really marking this as it should... But that’s not the goal either. The goal is the fair value. You don’t want to necessarily shoot under that.”
Undervaluing assets could mislead stakeholders and compromise the integrity of financial reporting. Cryptio has built a Fair Market Value module to help enterprises transition to the new fair value accounting standards, making compliance seamless (read about the module).
A key consideration for companies is understanding the scope of ASU 2023-08. Nick explained that the FASB deliberately left certain assets, such as NFTs and wrapped tokens, out of the new standards because they are already covered by existing frameworks, emphasizing the importance of applying these guidelines effectively.
As digital asset classifications continue to evolve, Jason emphasized the critical role of legal reviews in classifying wrapped tokens.
He explained: “Classification depends heavily on the enforceable rights of the holder over the underlying asset, making legal assessment of the T&Cs crucial.”
This highlights the necessity for rigorous legal and economic analysis to ensure compliance and accurate reporting. For finance teams, proactive collaboration between legal and accounting departments is essential to accurately classify and report assets like NFTs and wrapped tokens, ensuring compliance with evolving frameworks and mitigating audit risks.
Disclosing significant asset holdings involves a degree of subjectivity, as approaches vary: some companies report only their top five assets, while others disclose their top ten or even top 25.
Marissa suggested that companies consider how much investors rely on these financial statements and how decision-making might be affected if only the top 5% of assets were disclosed. “It really depends on the specific users of the financial statements,” she explained. “If you’re a publicly traded company with many people examining your financials, you may need more detailed and robust disclosures around significant assets.”
Marissa also advised companies to maintain consistency in their reporting practices each year, as changes could prompt greater scrutiny from auditors.
Determining fair value for less liquid assets, such as niche cryptocurrencies, presents a significant challenge.
Jason explained, “From a fair value perspective, when you deal with very illiquid tokens, that’s where a significant level of adjustment will come into play.” He emphasized the importance of standards like ASC 820 but noted that involving valuation specialists may be necessary for thinly traded assets to ensure accurate disclosures.
Jason added, “The good thing is that ASC 820 has been around for a very long time. Equity markets, like pink sheets, offer a good example: if a stock isn’t highly traded, you can’t necessarily rely on its market price as a proxy for fair value.”
Guidance within ASC 820 aids in assessing whether an active market exists for a given token and evaluating trading volumes to detect any significant declines. This approach helps determine if sufficient daily volume exists and if any valuation adjustments are necessary, though some level of subjectivity remains in the analysis.
As these classification challenges grow more complex, robust internal controls and risk management frameworks become increasingly critical. Internal controls and risk management frameworks must not only meet current reporting needs but also support future goals like IPOs, audits, and investments.
Marissa stressed that early internal controls ensure long-term compliance and boost investor confidence:
“If you are planning to IPO, take on investment, or get audited financial statements, it makes sense to start building your internal control matrix now.”
Marissa also highlighted how using third-party tools to complete accounting and reporting can create efficiencies and reduce human error.
She explained: “System controls are always a good thing. Anything you can automate and reduce human error is always a positive. The one thing to keep in mind is that if you are relying on a system, make sure there is a SOC report for it and someone is looking at the data integrity controls.”
Effective reconciliations help finance teams spot and resolve discrepancies before they become audit risks. Marissa emphasized the importance of reconciliation of internal systems with third-party blockchain and pricing data to be key in spotting discrepancies early.
For finance teams, automation, reconciliation, and documentation form the foundation of a strong control framework, ensuring compliance, reducing risk, and positioning the company for long-term success.
SAB 121 has reshaped how public companies report digital asset obligations, with significant implications for financial institutions. Understanding these changes is critical for finance professionals navigating audits and the evolving regulatory landscape.
David explained: “SAB 121 was an update from the SEC that affected how public companies would report their obligations to customers around digital assets”.
The guidance affects companies holding significant digital assets on behalf of clients, triggering heightened capital requirements and creating operational complexities for banks and large institutions. David noted that the inclusion of traditional, publicly traded companies has broadened the scope of entities impacted by SAB 121.
Marissa observed a recent shift in regulatory tone, noting that: “If you asked us a few weeks or a month ago, it would have been a lot of negative talk about SAB 121. But it seems like there's been some positive developments and relief happening."
The SEC has begun offering exemptions to certain entities, easing the compliance burden on financial institutions.
Other financial institutions are expected to seek similar exceptions, pushing for greater flexibility in reporting obligations. Finance professionals will need to assess their unique circumstances and take a fact-based approach to determine if they qualify for exemptions.