January 23, 2024

FASB’s Digital Asset Rule Change for Corporate Cash Management

We believe a major shift took place in mid-December when FASB provided an update to how digital assets held by companies are measured. Though it wasn’t as widely publicized as the many articles touting the approvals of spot bitcoin ETFs, it could be argued that this change was more significant for the digital asset industry.

What is ASU 2023-08?

The Financial Accounting Standards Board (FASB) recently published a significant update to the accounting standards for certain digital assets. The update is referred to as the Accounting Standards Update (ASU) 2023-08.

Under the new standard, companies must measure certain digital assets at fair value (a measurement technique which aims to capture the most up-to-date value) each reporting period, with the changes in fair value being recognized in net income.

The amendment applies to all digital assets that meet the following specifications:

  1. Meet the definition of an intangible asset as defined in the FASB Accounting Standards Codification®
  2. Do not provide the asset holder with enforceable rights to or claims on underlying goods, services, or other assets
  3. Are created or reside on a distributed ledger based on blockchain or similar technology
  4. Are secured through cryptography
  5. Are fungible
  6. Are not created or issued by the reporting entity or its related parties

FASB kept the new accounting rules narrow on purpose. Non-fungible tokens (NFTs) are excluded, as are stablecoins, issuer-created tokens, and wrapped tokens.

What Did it Replace?

This ASU reflected a massive shift from the previous model, where digital assets were accounted for at cost less impairment. This outgoing practice only let a company record the lows. Because digital asset values can swing wildly, companies previously often had to end up reducing the value of their holdings, which in turn would shrink earnings.

Businesses that bet on digital assets had long bemoaned this treatment as one-sided. That treatment meant companies had to record their digital assets at the price they paid, and mark them down permanently if their value had decreased. The only way to record gains was if they sold their holdings at a profit.

Why This Matters

One of the biggest benefits that we see in this change is increased transparency. These changes simplify the inclusion of digital assets on a company’s balance sheet, as it should reflect its true value more accurately. We think this gives investors and stakeholders a more accurate picture of a company’s financial health, since its digital assets will be measured at fair value. The ASU also introduces new disclosure requirements, which should allow companies to better communicate the performance of their holdings to investors and stakeholders.

Coupled with the approval of spot bitcoin ETFs, these regulatory actions could accelerate bitcoin’s adoption and integration into mainstream finance. The digital asset industry had previously asked FASB to write rules three times since 2017, and this was the first time they obliged. FASB members have stated that they’d be open to tackling more digital asset related issues in the future if they become more prevalent in practice.

When Does This Take Effect?

This change must be implemented for fiscal years beginning after December 15, 2024. Companies can adopt these changes early, but if a company chooses early adoption, it must be applied at the beginning of the fiscal year.

Alex’s Take

Companies like Apple have $160B+ in cash on their balance sheet.

The top 13 companies in the S&P 500 hold $1 trillion in cash.

According to the St. Louis Fed’s records, the government has increased the money supply by 7% per year since 1959. The purchasing power of cash has decreased by 97% since the Federal Reserve was instituted in 1913.

money supply chartSources: EconDataUS, St. Louis Fed, Crossover Capital research

What if there were a better way for companies to hold cash on their balance sheet in an asset that was more scarce than dollars? Publicly traded companies adopting bitcoin have been few and far between (Microstrategy and Tesla are more obvious examples).

Given these recent accounting changes, I believe it will become more feasible for the CFOs and Treasurers of public companies to utilize bitcoin as an inflation hedge for a portion of their large cash positions.

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Investment advisory services offered through Crossover Capital Brands, LLC (dba Crossover Capital), a Registered Investment Advisor with the U.S. Securities and Exchange Commission. This material is intended for informational purposes only. It should not be construed as legal or tax advice, and is not intended to replace the advice of a qualified attorney or tax advisor. This information is not an offer or a solicitation to buy or sell securities. The information contained may have been compiled from third party sources, and is believed to be reliable.

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