After a lag in issuing new guidance during the COVID-19 pandemic, the Financial Accounting Standards Board (FASB) ramped up its rule-making efforts in 2023. The FASB published seven new accounting standards updates (ASUs) and seven proposals for public comment last year. This article provides an overview of two new updates that were published in December 2023.
New Crypto Asset Rules
Under current practice, crypto assets are accounted for as intangible assets and reported on the balance sheet at historical cost. Those assets are deemed to be impaired when the price drastically drops. But, if the price goes back up, that impairment can never be recovered. Some companies that invest in cryptocurrencies, such as Bitcoin and Ethereum, have complained that this treatment doesn’t accurately reflect the underlying economics for digital assets.
In response to these concerns, the FASB issued ASU No. 2023-08, Intangibles — Goodwill and Other — Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets, on December 13, 2023. The landmark guidance is the first direct accounting standard on crypto assets. It will require crypto assets that meet the following six conditions to be measured at fair value:
1. They’re fungible. This term refers to an item that can be freely traded or replaced with something of equal value. This condition is specifically designed to exclude non-fungible tokens (NFTs) from the scope of the guidance.
2. They’re deemed to be intangible, which excludes securities and fiat currencies.
3. They don’t provide the asset holder with enforceable rights to, or claims on, underlying goods, services or other assets (such as with a contract).
4. They’re created or reside on a distributed ledger based on blockchain technology (thereby excluding software, media and data).
5. They’re secured through cryptography.
6. They aren’t created or issued by the reporting entity or its related parties.
Fair value represents the price that would be received if the company were to sell the crypto asset in an orderly transaction to a willing, knowledgeable buyer. Changes in value will be recognized in each reporting period as gains or losses in comprehensive income.
Companies must present crypto assets separately from other intangible assets on the balance sheet because they have different measurement requirements. This will result in a prominent display of crypto assets, providing investors with clear and transparent information about the fair value of crypto assets within the financial statements. In addition, businesses will need to provide detailed disclosures to help financial statement users understand crypto asset holdings, contractual sale restrictions and changes during the reporting period.
The updated guidance goes into effect for all entities for fiscal periods beginning after December 15, 2024, including interim periods within those years. Early application is permitted.
Enhanced Income Tax Disclosures
On December 14, 2023, the FASB issued Accounting Standards Update (ASU) No. 2023-09, Income Taxes (Topic 740) Improvements to Income Tax Disclosures. This controversial update will require companies to provide more details about rate reconciliation and certain types of income taxes they’re required to pay. Before the FASB proposed these changes, the U.S. Chamber of Commerce submitted a letter to the FASB, expressing concerns that the expanded disclosures will require companies to disclose too much information, which could be used by politically tainted noninvestor activists to show that corporations don’t “pay their fair share.”
Although the FASB narrowed the scope of its original proposal, the final standard will require companies to disaggregate rate reconciliation into the following eight categories:
1. State and local income tax, net of federal (national) income tax effect,
2. Foreign tax effects,
3. Enactment of new tax laws,
4. Effect of cross-border tax laws,
5. Tax credits,
6. Valuation allowances,
7. Nontaxable or nondeductible items, and
8. Changes in unrecognized tax benefits.
These categories will be further disaggregated by jurisdiction and for amounts exceeding 5% of the amount computed by multiplying the income (or loss) from continuing operations before tax by the applicable statutory federal (national) income tax rate. The rate reconciliation table will need to disclose both dollar amounts and percentages. Currently, companies can disclose either the dollar amounts or the percentages.
However, the FASB clarified that the updated guidance won’t require country-by-country disclosures. This was a key misunderstanding that FASB members discussed when reviewing public comments on the proposal.
The FASB contends that the enhancements to the current rate reconciliation table will help investors assess a company’s worldwide operations, related tax risks, tax planning and operational opportunities, all of which affect its tax rate and prospects for future cash flows.
ASU 2023-09 goes into effect for public companies for annual periods beginning after December 15, 2024. Interim reporting will be required for the following fiscal years (starting the first quarter of 2026). The standard will go into effect a year later for privately held companies. Early adoption is permitted.
For More Information
Although these new requirements haven’t yet gone into effect, companies that issue comparative statements will need to update their financial reporting procedures and systems as soon as possible to gather the appropriate information by the standards’ effective dates. Reach out to Hood & Strong to evaluate how the changes will affect your organization.
