Speculation has bubbled up about how fast the FASB, the nation’s main accounting rulemaker, can move to issue new accounting rules for Bitcoin and other cryptocurrencies recently touted by basketball icon Steph Curry and others.
It is not the FASB, but the vitriolic feedback it can receive from some stakeholders during its due process that can hinder a project, accounting professionals said.
“I feel like the people at the FASB are really smart when it comes to accounting, and if they decide to work on a project, their teams can come up with a reasonable accounting solution at a reasonably quick period of time,” Ray Pfeiffer, a professor at Simmons University said on Aug. 18, 2022. “All of the delays happen when they first expose a proposal to the public, and if that initial reaction is positive things can move really quickly – but it’s almost never uniformly positive because there are just so many different points of view,” he said.
Earlier this year in May, the FASB’s seven board members agreed to add a broad project to its technical agenda on accounting for and disclosure of digital assets, including crypto, after it received strong requests to develop the guidance. But FASB projects can take years to complete – as long as 15 – depending on the magnitude of the topic because of the due process the board has to follow to establish generally accepted accounting principles (GAAP) that work well in the U.S. capital marketplace.
Snags happen more often with broader projects than narrower ones. “One pattern has been to propose something comprehensive, but then in response to a lot of push back, breaking the project into pieces with just disclosure as a first step and then issues of recognition, measurement, and/or presentation in other separate parts of the project,” said Pfeiffer, a former FASB staff member. “And so I can envision something like that happening with these emerging issues as well.”
The move to develop accounting rules for crypto assets comes at a critical time for the Bitcoin and Ethereum market which saw values recently tumble – by trillions of dollars – fast. The topic has drawn tons of media coverage and tweets due in part to celebrities like Matt Damon, LeBron James, Jamie Foxx, Ashton Kutcher, Gwyneth Paltrow and Reese Witherspoon, among others, encouraging consumers to invest in them.
Currently, digital assets, including cryptocurrencies, are accounted for as intangible assets, which means that they are reported on the balance sheet at historical cost and then whenever the price goes down they are deemed impaired. But that impairment cannot be recovered and therefore when the price goes back up nothing can be done in financial reports to reflect that. The board has therefore heard complaints that current accounting rules do not accurately reflect the underlying economics for items like Bitcoin which are highly volatile. The FASB has therefore been asked to consider developing rules that would enable crypto to be recognized at fair value so that both losses and gains can be recognized.
Board Has to First Agree on Scope
The FASB has faced criticism in the past over how long certain projects take, but those views are not unanimous and others have stressed that due process is necessary for U.S. markets.
“The big thing I think about with standard setting is that it takes time to do it right,” said Shannon Garavaglia, assistant professor at Joseph M. Katz Graduate School of Business & College of Business Administration University of Pittsburgh.
“The FASB wants to make sure that they do outreach and talk through the needs of all the different stakeholder groups to find a balance, which includes financial statement preparers, auditors, and users,” she said on Aug. 19. “What makes it even more complicated is that these groups often have conflicting views, and so the FASB has to sort through who wants what and why to determine how they can come to a consensus that is going to put decision-useful information out there in a way that is not overly costly to preparers and auditors.”
During discussions, the board said it could address a full suite of rules – classification, measurement, presentation and disclosures for digital assets, but that may not be set in stone.
“The length of time it takes to issue something on this project is going to come down to scope, which is what they’re going to prioritize in initial discussions, so you’ll see that in upcoming meetings,” said Garavaglia, also a former FASB staff member. “Digital assets are a really broad asset class and even in the cryptocurrencies category you have things that are household names like Bitcoin and Ethereum contrasted with all of these other random cryptocurrencies popping up,” she said. “I think they need to, and they plan to, really clearly define the scope so that the rest of the project is a lot more manageable.”
To determine the scope, FASB staff research an issue and present their findings to the board in the form of “here’s what the universe of digital assets looks like and here’s the different ways we can slice it to define our specific scope.” Then, the board has to determine what makes sense and return to the question: “what’s the issue we were trying to address when we brought this onto the technical agenda.”
“I think the hardest thing with digital assets is that there are so many different forms of DAs, and even within a form there are different levels of quality or staying power,” said Garavaglia. “I think that’s what potentially will slow things down, is they’re going to take some time thinking through ‘should all cryptocurrencies be treated the same, even though they’re not necessarily the same in the eyes of the markets,’” she said. “With digital assets it’s kind of the Wild West, and they have to think about what guardrails they can put in place as they move through the project to stay on track.”
At a High Level: Process to GAAP
The board’s process is stringent toward the development of U.S. GAAP, criteria that public and private companies and nonprofits have to apply in financial statements, reports filed with the SEC. These rules have to be built, sometimes from scratch.
The FASB’s seven board members each have one vote in the development of a new standard, referred to as an Accounting Standard Update (ASU). At least four members have to vote in agreement for a rule to pass. No one board member has the full say on any issue.
The process takes time as the board first has to issue a proposal for public comment and then analyze them when they are submitted. The comment period can range from as little as 15 days to sometimes as much as 90 days or more, depending on the topic and size of the rules. After an analysis is made of comment letter responses, the board redeliberates major issues and if all goes well, a draft standard goes to external reviewers. The board also does an analysis of the costs versus the benefits of the rules, and determines an effective date. If all goes well, final rules are issued.
Public input is an important component of the board’s due process, and one it takes very seriously, according to a FASB spokesperson’s response to a Thomson Reuters query on the topic.
“FASB engages in significant stakeholder outreach throughout the standard-setting process to provide investors and other users decision-useful information to make informed capital allocation decisions,” the spokesperson said.
“The FASB proactively seeks stakeholder input at all stages of our due process, even before new standards are proposed, through public meetings, roundtables, field visits, advisory board meetings, presentations, and solicitation of public comment,” she said. “This feedback helps the Board to assess whether standard-setting projects will lead to better information, as well as to assess the expected costs. The FASB thoroughly analyzes and weighs the feedback received through comment letters or other outreach on proposed standards,” she said. “After carefully considering such feedback, FASB then re-deliberates the proposed standards, -including the cost of implementing changes against the benefits of enhanced information likely to flow to investors.”
This article originally appeared in the August 22, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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