By: Gary A. Vecchiarelli, CPA and CleanSpark Chief Financial Officer
It’s not often that something exciting happens in the world of accounting, but this week there was an important announcement for bitcoin and cryptocurrency companies that even non-accountants can appreciate. The Financial Accounting Standards Board, (FASB, or faz-bee, for short) said companies should measure crypto assets with an accounting method called fair-value accounting. The change allows for bitcoin and cryptocurrencies to be reflected at fair value on the balance sheet.
There are two reasons why this announcement is exciting for accountants and non-accountant alike, but first it is important to understand how we got here and what the changes mean for bitcoin and cryptocurrency companies.
FASB sets the rules for how U.S. companies account for certain transactions. Right now, companies who have bitcoin and other cryptocurrencies on their balance sheet have to account for those digital assets under a rule called ASC 360.
ASC 360 requires cryptocurrencies to be accounted for as intangible assets. Companies and investors have never liked the decision to treat cryptocurrencies as intangible assets because it is not an accurate way to represent the value of crypto on a company’s balance sheet.
Allow me to explain with an example. Under the current rule (that’s ASC 360), when we mine a bitcoin on Monday at a price of $25,000, we then record revenue of $25,000 and show a value of $25,000 on our balance sheet for that bitcoin.
But let’s say on Tuesday the price of bitcoin finishes the day at $24,000. ASC 360 requires us to write that bitcoin down by $1,000, thus impairing the asset. This process results in a line item on our income statement showing an expense of $1,000. Seems harmless and accurate so far, right?
Except that bitcoin and crypto is volatile. It goes up and down daily. So, if on Wednesday the bitcoin we mined on Monday increases to $26,000, we are not allowed to recognize that change. Instead, we have an asset worth $26,000 on our balance sheet that only shows as $24,000.
Under current rules, the fair value of bitcoin is not properly reflected.
But that isn’t the case with other liquid and volatile assets. For example, foreign currencies and other volatile investments qualify for mark-to-market accounting, or fair-value accounting (the point of this post), which allows you to show the fair value of the asset (bitcoin, in CleanSpark’s case), on the balance sheet. Any change–gain or loss—runs through the income statement, giving investors a much more accurate picture of a company’s bitcoin value.
This method, fair value accounting, is the best way to capture the value of crypto assets. It’s something many of us have been asking for.
Now, here are two reasons why I find this change so exciting.
First, investors will now have a more accurate picture of the fair value of a company’s digital assets as the value will be directly stated on the face of the balance sheet. No more digging through press releases or other disclosures to find the non-GAAP measures.
Second, and this is the reason I’m most excited about, is what this change symbolizes. It means that there is significant and growing adoption of bitcoin and digital assets, to the point that regulators can no longer ignore them anymore. Greater adoption has forced them to address the concerns and economic realities of our changing digital world. This change signals that regulators are finally catching up with innovation. They are realizing that bitcoin and crypto aren’t going anywhere and that more relevant rules for companies and investors alike are in the works.
That’s exciting news—even if you aren’t an accountant!