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Crypto assets – Accounting and reporting foundations · PwC's accounting podcast

0:00
SPEAKER_00: Thought Leadership from PWC's National Office.
0:07
SPEAKER_02: Hello, and welcome to PWC's Accounting Podcast.
0:10
SPEAKER_02: I'm Heather Horn.
0:12
SPEAKER_02: Today we're kicking off a two-part series on crypto.
0:15
SPEAKER_02: In the first episode, we'll focus on the fundamentals of accounting for crypto assets.
0:19
SPEAKER_02: Whether you're new to crypto or you've followed the space for a while and want a refresher, this episode is for you.
0:25
SPEAKER_02: So in today's episode, we'll provide an overview of crypto assets in the current market environment.
0:30
SPEAKER_02: We'll also dive into the FASBE's accounting standard, effective in 2025 for calendar year end companies with certain crypto assets, and highlight how existing gap concepts such as fair value apply.
0:44
SPEAKER_02: Our guest host for today is Diana Stolzfiss, a partner at PWC's National Office.
0:49
SPEAKER_02: She's joined by Beth Paul and John Van Osdal, also partners in the national office.
0:53
SPEAKER_02: Beth and John bring deep expertise in accounting and financial reporting with a focus on crypto.
0:58
SPEAKER_02: Beth is also the chair of the accounting subgroup of the AICPA's Digital Assets Workforce.
1:04
SPEAKER_02: So with that, let's hear their conversation.
1:06
SPEAKER_03: Well, welcome, Beth and John.
1:08
SPEAKER_03: So great to have you joining me today.
1:10
SPEAKER_03: We have a really exciting topic that we're gonna cover.
1:12
SPEAKER_03: We're gonna talk about crypto, a hot topic of the day.
1:16
SPEAKER_03: And there's been so many developments recently.
1:18
SPEAKER_03: So I'm really looking forward to our discussion.
1:20
SPEAKER_03: Thanks for having us.
1:21
SPEAKER_04: Yeah, great to be here.
1:22
SPEAKER_03: Well, let's just jump into it.
1:24
SPEAKER_03: So, Beth, maybe starting to give us some context, why has crypto become such a hot topic in financial reporting circles?
1:31
SPEAKER_01: Yeah, it's a great question, right?
1:32
SPEAKER_01: It's become a hot topic for several reasons.
1:35
SPEAKER_01: First, more companies, primarily in the fintech space, are considering the benefits of the underlying blockchain technology.
1:41
SPEAKER_01: And it's really because it can remove friction and reduce costs and operations.
1:45
SPEAKER_01: And second, the current US regulatory environment is considered more crypto friendly under the current administration.
1:51
SPEAKER_01: This is really creating a more diverse landscape.
1:54
SPEAKER_01: It's not just Bitcoin anymore.
1:55
SPEAKER_01: We're seeing more companies consider stable coins.
1:58
SPEAKER_01: There's also a whole ecosystem being developed to support crypto assets, think lending, borrowing, custody, et cetera.
2:05
SPEAKER_01: So originally crypto assets were meant to be a decentralized payment system without the need for a bank or another intermediary.
2:12
SPEAKER_01: But as part of the evolution, we're really seeing all those traditional players consider how the technology may be used in their space.
2:20
SPEAKER_01: So for example, instead of using shares in a money market fund, we're seeing money market funds consider issuing tokens in them instead, right?
2:28
SPEAKER_01: Because it might reduce the cost and the speed for settlement time.
2:31
SPEAKER_01: The other thing that's worth mentioning before we get too far into this podcast is there's a lot of different terms.
2:36
SPEAKER_01: Like I just said tokens and people say coins, and some people say digital assets, and some people say cryptocurrencies.
2:42
SPEAKER_01: And sometimes they're meaning them to be different, sometimes they're meaning them to be the same, right?
2:47
SPEAKER_01: There's no sort of defined, consistently used terms.
2:51
SPEAKER_01: And so that's really important to know.
2:53
SPEAKER_01: But generally, when you're using any of these terms, you are talking about a group of assets that trade or reside, I should say, on a blockchain that are secured using cryptographic technology.
3:03
SPEAKER_01: Um I think the other thing that's really important to know is we'll use generally the term crypto here, but we'll probably spend time defining the type of crypto we're talking about as we're going through the details, because the details will matter.
3:17
SPEAKER_01: And as we define the crypto, that's going to necessarily drive the accounting, right?
3:22
SPEAKER_01: We're also seeing that accounting evolve and change from an accounting perspective because we've seen the FASB issue a standard that addresses certain crypto assets that we'll get into a little bit here today, but to better reflect the economics of those types of transactions.
3:37
SPEAKER_01: And we're also seeing the SEC get more involved and issue speeches and guidance around this as well.
3:45
SPEAKER_01: Right.
3:46
SPEAKER_03: Okay.
3:46
SPEAKER_03: Well, that's really helpful baseline for us.
3:49
SPEAKER_03: So before we get into the accounting, which we know we all want to talk about, it's a hot topic too.
3:54
SPEAKER_03: Um but before we do, maybe John, I'll turn to you and you can give us some perspective on the market, what types of activity you're seeing, are there any trends that we should be aware of?
4:04
SPEAKER_04: Yeah, sure, Diana.
4:05
SPEAKER_04: So I think first and foremost, um I want to highlight there's been a run-up recently uh in the market cap of some of the crypto assets.
4:12
SPEAKER_04: So for example, we're near all-time highs on the price of Bitcoin.
4:16
SPEAKER_04: Um, and the market cap, interestingly, the market cap for all crypto assets on a combined basis is right around 4 trillion.
4:23
SPEAKER_04: So that's trillion with a T.
4:25
SPEAKER_04: Wow.
4:25
SPEAKER_04: It's a big number, right?
4:27
SPEAKER_04: Um, it's still relatively or smaller relative to the equity markets, right?
4:31
SPEAKER_04: But um it's steadily been rising.
4:34
SPEAKER_04: Another thing that I think is is interesting is um the use cases for crypto assets have evolved.
4:40
SPEAKER_04: So the market sentiment now is that people generally find value in these assets, and and there's a wide diversity of what the assets do and what they represent.
4:49
SPEAKER_04: So let's take tokenization.
4:51
SPEAKER_04: You take a real world asset, you make a digital representation of it, and you put it on the blockchain.
4:57
SPEAKER_04: And so, well, why would you why would you do that?
4:59
SPEAKER_04: Um, well, you know, the cost to invest in these assets is often really high.
5:04
SPEAKER_04: And so by tokenizing the asset, uh, you can take it, you fractionalize the ownership.
5:09
SPEAKER_04: That allows you to decrease the notional amount, you can set it at a smaller dollar level and potentially attract more investors to it.
5:18
SPEAKER_04: So it gives liquidity, you know, essentially, to assets that historically maybe haven't been as liquid.
5:23
SPEAKER_04: And there's a lot of lot of interest from uh institutional investors and others in this space.
5:28
SPEAKER_04: And so that's exciting because it's changing how one can invest in these types of assets.
5:35
SPEAKER_04: So think about financial services, right?
5:37
SPEAKER_04: What are the benefits of putting assets on the blockchain?
5:40
SPEAKER_04: Sometimes the the cost benefit may not be worth it.
5:44
SPEAKER_04: But in many cases, there is utility to using blockchain technology, whether you think about basic things like cutting out an intermediary, streamlining interactions with customers, uh, reducing the time lag between initiation and close of a transaction, things like that.
5:58
SPEAKER_04: So the blockchains used in other spaces you wouldn't typically think of as well.
6:03
SPEAKER_04: Uh art, real estate.
6:04
SPEAKER_04: So it's it's creating new opportunities in a broad uh array of areas.
6:09
SPEAKER_03: Aaron Powell That's super interesting.
6:10
SPEAKER_03: Well, one thing we've maybe mentioned, but really haven't gotten into is the regulatory environment.
6:16
SPEAKER_03: And the regulatory environment has changed a lot, and we've seen the SEC with a much different perspective under the current administration than the previous.
6:23
SPEAKER_03: John, can you share some insights here around what we're seeing in the regulatory environment and particularly the SEC?
6:29
SPEAKER_04: Yeah, certainly.
6:30
SPEAKER_04: And so Diana, you made a great point at the beginning there, right?
6:33
SPEAKER_04: And just to emphasize that, um the SEC chairman, uh, the SEC staff, they've they've made it clear, I think I've heard the words, it's a new day with respect to crypto assets at the SEC, and and they've clearly signaled they're going to be more crypto friendly.
6:47
SPEAKER_04: Um so there's a there's a couple of things that have happened uh since the start of the new administration, and we'll go go back a little bit, right?
6:53
SPEAKER_04: But um first is the the SEC created a crypto task force, um, which is chaired by Commissioner Hester Peirce.
7:00
SPEAKER_03: I think she's known as the crypto mom, right?
7:02
SPEAKER_04: I believe that's right.
7:03
SPEAKER_04: Yeah, long-standing background in crypto, right?
7:05
SPEAKER_04: Yes and um the task force has a mission to help develop a regulatory framework, provide clarity on registration and the disclosure framework for crypto assets.
7:14
SPEAKER_04: Uh so a lot, a lot there.
7:16
SPEAKER_04: Um the other thing is um if you go back to January of this year, the SEC staff released Staff Accounting Bulletin or SAB 122, which rescinded SAB 121.
7:28
SPEAKER_04: And so going back in time a little bit here, SAB 121 was interpretive guidance issued by the staff that essentially required a company to gross up its balance sheet when it had a uh custody over a crypto asset.
7:42
SPEAKER_04: So you had a crypto safeguarding liability or some type of liability, uh, as well as the asset on the books.
7:48
SPEAKER_04: Um, again, a balance sheet gross up.
7:50
SPEAKER_04: So SAB 122 repealed the guidance in SAB 121.
7:55
SPEAKER_04: Um it is uh already in effect.
7:58
SPEAKER_04: It's required to be applied retrospectively uh by companies.
8:01
SPEAKER_04: And so this balance sheet gross-up then is is now removed, right?
8:05
SPEAKER_04: Um, and prior periods have been revised in companies' financial statements.
8:10
SPEAKER_04: So again, pretty big change there, a big, big shift uh around.
8:13
SPEAKER_03: A relatively short period of time.
8:15
SPEAKER_04: Absolutely.
8:16
SPEAKER_04: Absolutely.
8:17
SPEAKER_03: Okay.
8:17
SPEAKER_03: Well, I think that's really helpful from the regulatory perspective.
8:19
SPEAKER_03: I think we also see, I think as you indicated, John, you know, there's these task force, we've seen, you know, speeches from the SEC, so definitely of different perspective.
8:27
SPEAKER_03: And when they release the rulemaking agenda too, we see that we expect more to come from an actual rulemaking perspective on crypto too.
8:33
SPEAKER_03: So it'll be interesting to see what happens there.
8:36
SPEAKER_03: So anything else we should be aware of before we we move on from the regulatory perspective?
8:41
SPEAKER_04: Yeah, there is a lot here.
8:42
SPEAKER_04: Um maybe just a couple of other things to highlight.
8:45
SPEAKER_04: Um, over the past few months, uh, the division of corporation finance that the SEC has issued a number of statements on crypto assets uh and the applicability of securities laws related to crypto assets or crypto asset activities.
8:59
SPEAKER_04: So think mining, staking, liquid staking, uh, among other areas.
9:04
SPEAKER_04: Um, the crypto task force, which I mentioned uh a moment ago, uh, they've conducted or will be holding a number of roundtables.
9:12
SPEAKER_04: And these discussions are intended to engage market participants, legal experts, uh, regulators, accountants, other advisors on various topics, um, asset classification, custody tokenization, uh, again, among others.
9:28
SPEAKER_04: And then maybe um one of the biggest developments, which I think we'll save in in more depth for a later discussion, is uh the passing of the Genius Act and that being signed into law for issuers of payment stable coins.
9:39
SPEAKER_04: So a lot going on from a regulatory perspective.
9:42
SPEAKER_03: Well, that's a great overview.
9:43
SPEAKER_03: Thank you, John.
9:44
SPEAKER_03: That was really helpful.
9:45
SPEAKER_03: So now let's turn to the accounting and we'll start with a key building block of classification.
9:50
SPEAKER_03: So, Beth, why is classification such a critical step in the accounting analysis?
9:54
SPEAKER_01: Yeah, it's really essential because classification is gonna drive the accounting model, like what you do on day one and day two.
10:01
SPEAKER_01: So the first question really is what is the asset I have?
10:04
SPEAKER_01: Is it a financial asset?
10:06
SPEAKER_01: Is it an intangible asset?
10:07
SPEAKER_01: Is it an intangible asset in the scope of the new crypto standard that sometimes people call 350, 60?
10:13
SPEAKER_01: But there is some new new guidance there.
10:15
SPEAKER_01: And all of this really is gonna drive the day two measurement and whether or not you're at fair value with a mark-to-market or maybe a traditional just cost impairment model.
10:26
SPEAKER_01: And it's gonna drive presentation and disclosure.
10:29
SPEAKER_01: So, in order to determine the classification, a company needs to analyze the crypto asset under gap.
10:35
SPEAKER_01: Probably no surprise there, right?
10:36
SPEAKER_01: That's what I do with any asset we own.
10:38
SPEAKER_01: So a good starting point is really to start to think does it meet the definition of a financial asset?
10:44
SPEAKER_01: And that's really you look at whether you as the holder have a contractual right to cash or another financial instrument from the issuer.
10:52
SPEAKER_01: If it does, then you're gonna have some additional considerations to think about, like, okay, so it's a financial asset.
10:57
SPEAKER_01: Is it a debt security, an equity instrument?
10:59
SPEAKER_01: Is it a receivable?
11:00
SPEAKER_01: Does it meet the definition of cash equivalent?
11:02
SPEAKER_01: So there'll be like additional follow-on analysis.
11:04
SPEAKER_01: But if it's not a financial asset, then you say, okay, well, what is it?
11:08
SPEAKER_01: And it's likely going to be an intangible asset.
11:11
SPEAKER_03: Okay, so that makes sense.
11:12
SPEAKER_03: Since crypto assets are not physical assets, can you explain further why it's likely it's an intangible asset?
11:19
SPEAKER_01: Yeah, I mean, if it's not the financial asset, then it's likely an intangible because when we think about the gap hierarchy, right?
11:26
SPEAKER_01: The only other thing you might be saying is, well, could it be inventory?
11:29
SPEAKER_01: But under US GAAP, and this is a US GAAP IFRS difference, US GAAP says inventory has to be a tangible asset.
11:34
SPEAKER_01: And because these are intangible, they're not going to meet the definition of inventory under ASC 330.
11:41
SPEAKER_01: So then we look at intangible, and that's a pretty fairly wide definition in gap and says, you know, is it all?
11:48
SPEAKER_01: And yeah, hey, this is intangible.
11:50
SPEAKER_01: It lacks physical substance.
11:51
SPEAKER_01: So in fact, it it meets that criteria.
11:53
SPEAKER_03: Okay, great.
11:55
SPEAKER_03: So taking it a step further, as I understand it, just because it's an intangible doesn't mean you're you're quite done in terms of the accounting.
12:02
SPEAKER_03: So, John, can you tell us about the FASBE's accounting standard on this topic?
12:06
SPEAKER_04: Yeah, sure.
12:07
SPEAKER_04: So it at the end of 2023, the FASBE issued guidance on this.
12:11
SPEAKER_04: It's ASU 2023-08.
12:15
SPEAKER_04: Um, that it's effective for calendar year end companies in 2025, including the interim periods.
12:21
SPEAKER_04: And so stepping back, maybe prior to this guidance, as we've been talking about classification, right?
12:27
SPEAKER_04: Um, most companies that held investments in crypto assets determined that they were indefinite lived intangible assets.
12:33
SPEAKER_04: So again, we're going back to the points we've been talking about on why classification is so important.
12:38
SPEAKER_04: Um under the new standard, in-scope crypto assets, and we'll I'll talk about scope in a moment, but um, in-scope crypto assets are subsequently measured at fair value each reporting period and the remeasurements recorded in net income.
12:51
SPEAKER_04: Uh so mark to market through the PL, effectively.
12:54
SPEAKER_04: Um prior to this new standard under GAP, these assets followed a costless impairment model in accordance with the Indefinite Live asset accounting model, ASC350-30.
13:07
SPEAKER_04: And so you would write down the value of the asset for impairment, but you couldn't write it up as value subsequently uh increased.
13:16
SPEAKER_04: And that was one of the big pain points in the marketplace.
13:19
SPEAKER_04: And many held the view that that accounting framework didn't represent uh the economics or the substance of those types of assets.
13:26
SPEAKER_03: Aaron Powell One of the accounting standards that seems like it was welcomed.
13:29
SPEAKER_03: That's right.
13:29
SPEAKER_03: Yep, that's right.
13:30
SPEAKER_03: So this new guidance is already effective for many companies.
13:33
SPEAKER_03: But since we're getting back to the fundamentals in this episode, let's dive in further.
13:38
SPEAKER_03: So starting with scope, John, as you mentioned a moment ago, what types of assets fall within the scope of the FASBI's guidance?
13:45
SPEAKER_04: Yeah, great, great question.
13:46
SPEAKER_04: So the A the new ASU, it established a new section in the codification.
13:51
SPEAKER_04: Beth mentioned it earlier.
13:52
SPEAKER_04: It's ASC 350-60.
13:54
SPEAKER_04: So lots of accountant terms here in the in the codification.
13:57
SPEAKER_04: Um it's narrow in scope, and that was purposeful.
14:01
SPEAKER_04: Okay.
14:01
SPEAKER_04: Um and so it applies to certain types of crypto assets.
14:05
SPEAKER_04: They need to meet six criteria.
14:07
SPEAKER_04: They have to meet all six.
14:08
SPEAKER_04: And so bear with me for a moment.
14:10
SPEAKER_04: I'll I'll go through them, but I want to be a little bit precise here.
14:13
SPEAKER_04: I won't use the exact words.
14:14
SPEAKER_04: So uh the first is that the asset must meet the definition of an intangible asset under gap.
14:20
SPEAKER_04: So in other words, it it has to lack physical substance.
14:23
SPEAKER_04: Um that also means it can't be classified as some other type of asset like a financial asset.
14:28
SPEAKER_03: Aaron Powell So the analysis Beth talked about just now.
14:31
SPEAKER_04: Exactly.
14:31
SPEAKER_04: Exactly.
14:32
SPEAKER_04: Uh the second is it can't provide enforceable rights to underlying goods, services, or assets.
14:38
SPEAKER_04: All right.
14:39
SPEAKER_04: That's pretty clear.
14:40
SPEAKER_04: Uh the third, again, is pretty clear.
14:42
SPEAKER_04: It must be created or reside on a distributed ledger using blockchain or similar technology, fundamental.
14:49
SPEAKER_04: Um, fourth is that it has to be secured through cryptography.
14:53
SPEAKER_04: Uh the fifth is that it must be fungible.
14:56
SPEAKER_04: Okay.
14:56
SPEAKER_04: Um we may talk a little bit about non-fungible tokens or NFTs, those are out.
15:01
SPEAKER_04: Okay.
15:01
SPEAKER_04: Um and then the sixth is it can't be created by the reporting entity or one of its related parties.
15:07
SPEAKER_04: Um those are the six criteria you have to meet to be in scope of the new uh FASB standard.
15:12
SPEAKER_03: Okay.
15:12
SPEAKER_03: So traditional cryptocurrencies like Bitcoin and Ether are in the scope of this new guidance.
15:18
SPEAKER_03: So, Beth, can you give us a few examples of assets that are not in scope of this guidance and why?
15:24
SPEAKER_03: Right, sure.
15:25
SPEAKER_01: I mean, so stable coins, which I know we're gonna talk a lot about, but in another episode.
15:29
SPEAKER_01: But right, stable coins are a right to redeem for cash from the issuer, oftentimes, right?
15:34
SPEAKER_01: And so they're gonna be a financial asset and they're gonna be out of scope of this new guidance.
15:39
SPEAKER_01: The other one, and and John mentioned it when he went through the criteria, NFTs.
15:43
SPEAKER_01: So, you know, NFTs often are you know visual images of art or things that um, you know, kind of we call them the virtual trading cards, those sorts of things.
15:54
SPEAKER_01: They're non-fungible by nature, so they fail the fungibility test that's required for the new standard.
15:59
SPEAKER_01: And then things like investments in ETFs, right?
16:02
SPEAKER_01: Those are actual investments in the shares of a vehicle that holds the crypto, but not an interest or ownership in the underlying crypto itself, right?
16:11
SPEAKER_01: So you're not looking through, you're saying, no, I own shares in a company, and therefore that's gonna be out of scope.
16:17
SPEAKER_01: And then wrap tokens or receipt tokens oftentimes are not going to be in scope of the new standard.
16:25
SPEAKER_01: And these are things that are linked to the underlying asset that the holder can reclaim.
16:30
SPEAKER_01: So if the wrap token provides a right to the holder, to the underlying crypto asset, that redemption right gives them a enforceable right or claim to an asset, which takes them out of scope under that second criteria that John mentioned.
16:46
SPEAKER_01: This may be the case, it may not be the case.
16:48
SPEAKER_01: Like wrapping of tokens can happen in different ways.
16:51
SPEAKER_01: And so you have to really understand what you're entitled to, just like anything.
16:55
SPEAKER_01: You really got to understand your terms and conditions.
16:57
SPEAKER_01: But oftentimes it's kind of interesting, right?
16:59
SPEAKER_01: You would take a Bitcoin, which would be in scope, you're going to wrap it, and that new wrap token gives you a right to the Bitcoin.
17:06
SPEAKER_01: And since it gives you a right to an asset, you're now out of scope.
17:11
SPEAKER_01: Um, and you may be back now in the traditional intangible model with the impairment.
17:17
SPEAKER_03: Interesting.
17:18
SPEAKER_03: Interesting.
17:19
SPEAKER_03: Okay, so what happens if you're not in scope of this guidance?
17:23
SPEAKER_01: Well, if you're not in scope of the new guidance, then you look to see if you're in scope of other gap, like financial assets or regular intangible asset guidance in 350-30, which again is that costless impairment model.
17:35
SPEAKER_01: So maybe go back to the beginning of our podcast.
17:38
SPEAKER_01: Start again.
17:39
SPEAKER_01: Go back and go into that flow chart over and over again of like what do I have?
17:43
SPEAKER_03: Okay, so obviously scope is really important.
17:46
SPEAKER_03: And the biggest change in the new standard is the subsequent measurement at fair value, which I think was welcomed by many market participants.
17:53
SPEAKER_03: And we'll come back to that in a few minutes.
17:55
SPEAKER_03: But another important aspect of the new standard is presentation and disclosure requirements.
18:00
SPEAKER_03: Beth, can you share some perspectives on these new requirements?
18:03
SPEAKER_01: Yeah, sure.
18:04
SPEAKER_01: Happy to.
18:04
SPEAKER_01: I mean, I'll start with presentation first.
18:06
SPEAKER_01: So the new accounting standard requires those in-scope crypto assets to be presented separately from any other intangible asset on the face of the balance sheet.
18:15
SPEAKER_01: So you've got to have its own line.
18:16
SPEAKER_01: The FASP didn't address where on the balance sheet the crypto intangibles should be presented, but we generally think that since they're intangible assets, they're presented as non-current assets.
18:27
SPEAKER_01: However, companies do need to evaluate their specific facts and circumstances.
18:30
SPEAKER_01: And then in terms of classification on the income statement, the gain or loss associated with the remeasurement of the crypto asset, you know, that mark to market is reported in net income separately from changes in carrying amount of other intangible assets.
18:43
SPEAKER_01: So for example, we wouldn't commingle that remeasurement to fair value with amortization or impairment losses related to what I'll call our traditional intangibles.
18:52
SPEAKER_01: And the FASB here again didn't tell people where on the PL these gains or losses need to be presented, but we typically expect those to be presented within operating income if you've got that two-step income statement.
19:04
SPEAKER_01: Okay, great.
19:04
SPEAKER_03: That's that's good to know.
19:06
SPEAKER_03: And then what about the statement of cash flows?
19:08
SPEAKER_03: We know we often get a sense that it's the statement that gets put off to the end and people aren't focused on it.
19:14
SPEAKER_03: So let's bring that statement in and think about what are the any special requirements for the statement of cash flows?
19:19
SPEAKER_01: Yeah, so basically companies are expected to follow the sort of standard guidance of cash flows, but there was one unique item that is in the standard that it's probably good to highlight.
19:29
SPEAKER_01: So I'm glad you brought it up.
19:30
SPEAKER_01: It's that if the company receives in-scope crypto assets in the ordinary course of business, so technically, right, that's going to be non-cash consideration received, but then they're going to nearly immediately convert that crypto into cash.
19:44
SPEAKER_01: There is an explicit requirement for the company to classify the cash received in operating activities.
19:50
SPEAKER_01: And the Spazby did go on to clarify that nearly immediately is quite a fast turnaround.
19:55
SPEAKER_01: It needs to be within hours or maybe a few days, but it's not like weeks or three months.
20:01
SPEAKER_01: It's you know very short time.
20:02
SPEAKER_01: Very, very short time.
20:04
SPEAKER_03: Okay.
20:04
SPEAKER_03: Okay, got it.
20:05
SPEAKER_03: So now I think we've covered the highlights for presentation.
20:08
SPEAKER_03: What about disclosures?
20:09
SPEAKER_03: What are the key requirements there?
20:11
SPEAKER_01: Yeah, so there are both interim and annual disclosure requirements for any significant crypto asset.
20:16
SPEAKER_01: And the FASB here did not define significant, but this threshold exists in other standards, like the new segment standard that just came out for with significant expenses.
20:25
SPEAKER_01: So preparers have some experience here that they can leverage when considering if they think the disclosure would be useful to users of the financial statements.
20:33
SPEAKER_01: And then on an interim basis, a company is required to disclose the name of the crypto asset, its cost basis, its fair value, and how many units of the crypto asset they have.
20:43
SPEAKER_01: Companies also need to disclose if there is any restrictions on the ability to sell the crypto asset.
20:49
SPEAKER_01: The company is required to disclose the nature of the contractual sales restrictions and what would cause those restrictions to lapse.
20:55
SPEAKER_01: And then sometimes these lockup periods are associated like with new coins.
21:02
SPEAKER_01: Like people are saying, like, well, why would I have a restriction?
21:04
SPEAKER_01: A lot of times if you've been involved in like an initial coin offering and bought those initial early stage issuances, you do have this lockup period that you need to disclose.
21:12
SPEAKER_01: Sort of similar to like traditional investments in early stage IPOs and the like.
21:16
SPEAKER_03: Okay, that's really helpful.
21:18
SPEAKER_03: Beth, you also mentioned that there are annual or additional annual disclosures as well.
21:22
SPEAKER_03: Can you talk about those?
21:23
SPEAKER_01: Yeah, sure.
21:24
SPEAKER_01: So for an annual perspective, you have to do a roll forward.
21:26
SPEAKER_01: So you're thinking like, what's my beginning balance of my crypto asset on a crypto asset by crypto asset basis?
21:31
SPEAKER_01: What were the additions?
21:32
SPEAKER_01: What were the disposals?
21:33
SPEAKER_01: What are my recognized gains?
21:34
SPEAKER_01: And what are my recognized losses?
21:36
SPEAKER_01: So each of those sort of separately disclosed.
21:38
SPEAKER_01: There's also a requirement to describe the nature of the activities that created the additions and disposals.
21:43
SPEAKER_01: So that might be pretty basic, right?
21:45
SPEAKER_01: Like I got the additions through purchases.
21:48
SPEAKER_01: But it could also be things like, hey, I got that receipts from customers, or maybe I did mining activities and staking, which I know we'll cover on a different way into that.
21:56
SPEAKER_01: Right.
21:56
SPEAKER_01: And same thing with disposals.
21:57
SPEAKER_01: It could just be, hey, I sold it, but it could be.
22:00
SPEAKER_01: No, you know, I had a slashing penalty related to my staking activities.
22:03
SPEAKER_01: So you do need to like disclose the nature of the activity there.
22:06
SPEAKER_01: Okay.
22:06
SPEAKER_03: So to recap, ASC 35060 applies to a very specific set of crypto assets, albeit some of the biggest names.
22:14
SPEAKER_03: They have to meet certain criteria, which John went through, the six criteria.
22:19
SPEAKER_03: And if they are in scope, they're re-measured at fair value.
22:23
SPEAKER_03: And don't forget that there are incremental presentation and disclosure requirements.
22:27
SPEAKER_03: Is that is that a good summary, Beth?
22:29
SPEAKER_03: That's a great summary.
22:30
SPEAKER_01: I'm ready to have you consult on the team with us.
22:34
SPEAKER_01: It's also likely, though, I just highlight for our listeners that we do expect some future standard setting in this space.
22:39
SPEAKER_01: So you know, we're recording this today, but stay tuned because we know the FASB is added to their research agenda to look at whether certain payment digital assets are cash equivalents and maybe to look at the accounting for digital asset transfers such as crypto lending.
22:56
SPEAKER_01: So I think just be mindful of when you're listening to this and whether new stuff has come out.
23:00
SPEAKER_03: Right, right.
23:00
SPEAKER_03: That seems like an area too where there's a lot of evolving guidance.
23:04
SPEAKER_03: It's a newer area, and we're seeing both the SEC and the FASB taking action in this area.
23:09
SPEAKER_03: So a good point to keep on top of the developments.
23:12
SPEAKER_03: So we've talked about a key aspect of the new ASU being that companies with crypto assets that are in scope are measured at fair value.
23:20
SPEAKER_03: And of course, fair value isn't a new concept.
23:23
SPEAKER_03: There's existing guidance that addresses this topic.
23:25
SPEAKER_03: But John, are there any potential pitfalls companies should be mindful of?
23:30
SPEAKER_04: Yeah, sure.
23:30
SPEAKER_04: And and Diana, I do think it's important what you said around that the these questions around how to apply the fair value guidance are not new, but we're thinking about them with respect to, you know, a call relatively new asset class or just stepping back, the the Fazby's fair value guidance is ASC 820.
23:47
SPEAKER_04: And under that guidance, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
23:58
SPEAKER_04: Okay, so let's let's talk about how fair value is determined.
24:01
SPEAKER_04: Uh a company needs to determine the principal market for the crypto asset that it's valuing, and the principal market is the one with the greatest volume and level of activity for the particular asset uh that's being valued.
24:13
SPEAKER_04: And if there's no principal market, then you look to the most advantageous market uh under the FASBE's guidance.
24:19
SPEAKER_04: So if the crypto assets are in an active market, let's take Bitcoin, for example, which is traded on a major crypto exchange, uh, you first think about what the principal market is.
24:30
SPEAKER_04: In our example, the exchange with the greatest volume and level of activity for Bitcoin.
24:35
SPEAKER_04: And then if available, you use the quoted market price uh from that exchange without adjustment as the fair value of your crypto asset.
24:43
SPEAKER_04: And so that's what GAP would refer to as a level one input in the fair value hierarchy.
24:48
SPEAKER_01: Yeah, and maybe one point, John, that I make is that we are seeing SEC comment letters when companies disclose that they've determined fair value using what they'll describe as a data aggregator.
24:59
SPEAKER_01: And so it's important to understand an aggregator is not a market or exchange, right?
25:04
SPEAKER_01: They're taking a bunch of different prices and aggregating them.
25:07
SPEAKER_01: And so when you're doing that, that's not your principal market, and that's really not the price that we should be using under the fair value model.
25:14
SPEAKER_03: Okay, very interesting and great point.
25:16
SPEAKER_03: That makes sense.
25:18
SPEAKER_03: That you need a specific price from a principal market of the company and not just using this average or some readily available pricing source.
25:26
SPEAKER_04: Yeah.
25:26
SPEAKER_04: So another question we've seen on this is how you think about entity-specific restrictions.
25:33
SPEAKER_04: So, say lockups uh in which the crypto holder is restricted from selling any asset.
25:38
SPEAKER_04: And these entity-specific restrictions don't reduce the fair value of a crypto asset.
25:43
SPEAKER_04: So, fair value, again, going back to the definition, is a market participant concept, uh, not the holder's unique circumstances.
25:51
SPEAKER_04: Uh, but if there is a restriction that's a characteristic of the asset itself as opposed to the holder, that could impact the fair value of the crypto asset.
25:59
SPEAKER_03: Okay, that's a great point.
26:01
SPEAKER_03: John, any other common questions that we're getting as it relates to fair value?
26:06
SPEAKER_04: Yeah, the the other one I would highlight um relates to cutoff.
26:10
SPEAKER_04: Um and so if you think about it, unlike traditional markets, uh, crypto markets often don't have a market close.
26:17
SPEAKER_04: They they trade 24-7 or some some have 24-5.
26:21
SPEAKER_04: And so, because of this, companies need to establish a process to obtain market prices through the end of the day as of the reporting date to assess the fair value of the crypto assets.
26:32
SPEAKER_04: And there's guidance in ASC 820 that already exists uh on this topic about evaluating events uh after the close of the market, but before the end of the measurement date.
26:42
SPEAKER_04: But here, what we want to reiterate is that the company would in fact need to evaluate pricing from its principal market up until the last trading price prior to the end of the measurement date.
26:54
SPEAKER_04: So technically speaking, what we often say is that would be right before midnight in the time zone of the reporting entity.
27:01
SPEAKER_03: Wow.
27:01
SPEAKER_03: That's really interesting.
27:03
SPEAKER_03: Well, this has been a great discussion.
27:05
SPEAKER_03: We've covered a lot.
27:06
SPEAKER_03: Any final thoughts?
27:08
SPEAKER_03: You want to make sure our listeners are keeping top of mind.
27:11
SPEAKER_03: Maybe John, I'll start with you.
27:13
SPEAKER_04: Yeah, so as we've talked about a few times today, Diana, it's it's a new day with respect to crypto assets.
27:19
SPEAKER_04: It's a different regulatory framework and mindset than what we've seen in the past few years.
27:24
SPEAKER_04: And it's probably only likely that crypto assets will become more prevalent.
27:28
SPEAKER_04: So as I talk to companies and others, right, I think it's critical to build your foundation now and really go back to make sure you understand uh the purpose of the crypto asset, its terms and conditions, the risks, uh the accounting and financial reporting considerations, and then maybe linking back to again to the question on cutoff and other areas, controls and governance over these assets.
27:51
SPEAKER_01: That makes sense.
27:52
SPEAKER_01: Beth?
27:53
SPEAKER_01: Yeah, I think for me it's don't go it alone.
27:55
SPEAKER_01: This is really an evolving area, and a lot of the products don't neatly fit into the specific accounting models that exist or weren't contemplated, right?
28:05
SPEAKER_01: Right.
28:05
SPEAKER_01: So I think it's really helpful to discuss with either your auditors, your advisors, or in maybe certain situations with the SEC to get, you know, to get help and to really um address some of the nuances here.
28:18
SPEAKER_03: Well, I think those are those are all great points.
28:20
SPEAKER_03: Thank you both so much for joining me today.
28:22
SPEAKER_03: It was a great discussion.
28:24
SPEAKER_03: Thanks for having us.
28:24
SPEAKER_02: Thanks.
28:26
SPEAKER_02: That's our show for today.
28:28
SPEAKER_02: Tune in next week for more fresh episodes.
28:31
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28:48
SPEAKER_02: From Thought Leadership at PWC, I'm Heather Horn.
28:52
SPEAKER_02: Thanks for tuning in.
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