The landscape of accounting for cryptocurrencies is undergoing a significant transformation. New research from Robbie Moon, a professor at the Scheller College of Business, along with co-authors Chelsea M. Anderson, Vivian W. Fang, and Jonathan E. Shipman, examines how U.S. public companies have adapted their accounting practices regarding cryptocurrency over the past decade. With the introduction of ASU 2023-08 by the Financial Accounting Standards Board (FASB), companies are now required to adopt fair value reporting for cryptocurrencies, a move that aims to enhance clarity and consistency in financial statements.
This research, published in the Journal of Accounting Research, provides insights into the surge in corporate investments in cryptocurrencies from 2013 to 2022. The findings reveal a diverse and often inconsistent landscape in how companies report their crypto holdings. Moon’s study delves into the motivations behind corporate cryptocurrency investments, which primarily include mining, payment acceptance, and speculative investment.
Understanding Corporate Cryptocurrency Holdings
Companies typically hold cryptocurrencies for three main reasons: to mine them, to accept them as payment, or to invest in them. Initially, many businesses used cryptocurrencies as a medium for transactions. However, this trend saw a decline around 2017, as more companies began to mine cryptocurrencies themselves. Currently, mining represents approximately half of corporate crypto holdings, with the remaining share divided between payment acceptance and investment.
Until the end of 2023, there were no standardized rules governing how companies reported their cryptocurrency holdings. In 2018, the Big Four accounting firms—Deloitte, PwC, EY, and KPMG—offered guidance suggesting that cryptocurrencies be treated like intangible assets, following an impairment model. This model allows companies to record losses only when the value drops below their purchase price but does not permit the recognition of gains when prices rise.
Transitioning to Fair Value Accounting
The introduction of ASU 2023-08 marks a decisive shift from the impairment model to a fair value model for accounting crypto assets. This new approach updates the value of cryptocurrencies to reflect current market prices at each reporting period. Consequently, any fluctuations in value—whether gains or losses—are recorded on the company’s income statement. In contrast, the impairment model can often lead to an understatement of a company’s crypto assets during periods of rising prices, as it does not allow for the acknowledgment of gains.
The decision to adopt the fair value model was influenced by extensive public feedback solicited by the FASB. Practitioners and firms overwhelmingly advocated for this model, prompting the Board to incorporate it into its accounting standards.
The role of major accounting firms in shaping cryptocurrency reporting cannot be understated. As the FASB developed its new guidelines, these firms provided critical insights based on existing standards. After the 2018 guidance, many companies shifted from fair value reporting to the impairment model, reflecting the prevailing advice from these firms. With the new fair value requirement, these firms will likely assist clients in adapting to the updated accounting standards.
The implications of using fair value accounting for cryptocurrencies are substantial. While this approach may provide more timely reflections of asset values, it also introduces potential volatility in stock prices. Moon’s research indicates that companies employing the fair value model experience increased stock price volatility, which might not enhance the usefulness of earnings reports for investors. It is important to note that the findings stem largely from a sample of smaller companies, which may not fully represent the broader market.
As the interest in cryptocurrencies continues to grow among corporations, understanding these accounting changes is crucial. Moon’s research serves as a benchmark for evaluating how businesses managed their crypto investments prior to the establishment of official rules in 2023. It highlights the need for ongoing examination of the effects of the fair value approach, particularly concerning stock price stability and investor perceptions.
In summary, the evolving accounting standards for cryptocurrencies represent a pivotal shift in financial reporting. The implementation of ASU 2023-08 aims to standardize how companies account for these volatile digital assets, with the potential for both increased transparency and market volatility. As businesses navigate this new terrain, the research by Moon and his colleagues will be essential for understanding the implications of these changes in the financial landscape.
