The FASB, the nation’s major accounting rule maker, has been subject to speculation about its ability to issue accounting rules for cryptocurrencies like Bitcoin, as recently touted by NBA icon Steph Curry.
Accounting professionals say it isn’t FASB’s due process that hinders a project, but the vitriolic feedback received from some stakeholders.
A professor at Simmons University, Ray Pfeiffer, stated on Aug. 18, 2022, that the FASB is a very smart organization in terms of accounting, and that their teams can come up with an accounting solution in a reasonable amount of time if they decide to work on a project.
In his view, all delays occur once a proposal is revealed to the public, and if the initial response to the proposal is positive, then things can be done fairly quickly. However, the response is almost never uniformly positive since there are so many differing viewpoints.
Following strong requests to develop guidance on digital assets, including crypto, the FASB’s seven board members agreed earlier this year to add a broad project to its technical agenda.
It can take the FASB years to complete a project, depending on how complicated the topic is, as it needs to establish generally accepted accounting principles (GAAP) that are applicable to the American capital market. Broader projects encounter snags more frequently than narrow ones.
In response to a lot of pushback, Pfeiffer, a former FASB staff member, broke the project into pieces after proposing something comprehensive, then focusing only on disclosure as a first step, followed by recognition, measurement, and/or presentation in separate parts,” he explained. The emerging issues could be handled similarly with something like that.
Bitcoin and Ethereum markets recently saw their values plummet – by trillions of dollars – dramatically after new rules were developed to account for crypto assets.
Media outlets and social media accounts have covered the topic extensively since celebrities such as Matt Damon, LeBron James, Jamie Foxx, Ashton Kutcher, Gwyneth Paltrow, and Reese Witherspoon, among others, have encouraged consumers to invest in them.
Cryptocurrencies, including digital assets, are currently classified as intangible assets, which means they are reported at historical cost and are impaired whenever their price falls.
When the price goes back up, however, the impairment cannot be recovered, so it cannot be reflected in financial reports.
Due to the highly volatile nature of items like Bitcoin, the board has received complaints that the current accounting rules do not appropriately reflect the underlying economics.
To ensure that both losses and gains can be recognized, the FASB has been asked to develop rules enabling crypto to be valued at fair value.
Board Has to First Agree on Scope
Others have argued that due process is essential for U.S. markets, but the FASB has faced criticism for how long certain projects take.
In my opinion, the biggest challenge with standard setting is getting it right. According to Shannon Garavaglia, assistant professor at the Joseph M. Katz Graduate School of Business & College of Business Administration, the process takes time.
As she explained on Aug. 19, “FASB wants to find a balance between the requirements of financial statement preparers, auditors, and users.”
These groups often hold conflicting views, which makes it even more complicated, so it is up to the FASB to figure out who wants what and why so that they can develop a consensus that will provide decision-useful information while not being overly expensive for preparers and auditors.
Board members said they might be able to address classification, measurement, presentation and disclosure for digital assets, but that might not be finalized.
In the early meetings, they’ll prioritize scope, so in upcoming meetings, you’ll see that in terms of how much time it takes for them to issue something for this project,” said Garavaglia, also a former FASB employee.
She noted that digital assets cross a wide range of asset classes, and even in the cryptocurrency category you find household names like Bitcoin and Ethereum mixed in with random crypto assets appearing all the time.
As a result, the rest of the project will be much more manageable if they can clearly define the scope, and they plan to do that.”
According to FASB staff, scope is determined through research and presentation to the board. Staff reports show how the digital asset universe appears and different ways it can be sliced to define the scope.
Once what makes sense is determined, the board needs to return to the question: “what was the issue we were trying to address?”
In Garavaglia’s opinion, digital assets are challenging because there are so many forms of them, and even within a form there are different levels of quality.
According to her, that’s one of the things that may slow things down, because they’ll need to think about whether all cryptocurrencies should be treated equally, even though they may not be treatable equally in the eyes of the market.
It is kind of the Wild West with digital assets, so they have to figure out how to keep an eye on the project’s progress.
At a High Level: Process to GAAP
SEC filings and financial statements must adhere to the US GAAP criteria developed by the board. It is sometimes necessary to build these rules from scratch.
An Accounting Standard Update (ASU) is developed by the FASB’s seven board members with one vote each. A rule must be approved by at least four members. It is impossible for any board member to have full control over any issue.
Due to the lengthy process of issuing a proposal, public comments must be submitted and then analyzed by the board. Depending on the topic and the size of the rule, the comment period can range from 15 to 90 days. A draft standard is given to external reviewers once the board has analyzed the comments in the comment letters. Furthermore, the board determines a date for the rules to take effect based on the costs and benefits they will produce. Final rules will be issued if everything goes smoothly.
FASB spokesperson stated in response to a Thomson Reuters query on the topic that public input is a vital part of the board’s due process. A spokesperson stated, “FASB strives to provide investors and other users with useful information throughout the standard-setting process to help them make informed investment decisions.”
We actively seek stakeholder input at all stages of our due process, even before we propose new standards, through public meetings, roundtables, field visits, advisory board meetings, presentations, and public comments,” she explained.
In addition to assessing a standard-setting project’s potential benefits and costs, this feedback also allows the Board to make informed decisions on how best to proceed. As part of its analysis and weighing of feedback received on proposals for standards, the FASB receives a great deal of feedback from comment letters as well as other methods of outreach,” she added.
“Accordingly, FASB then re-deliberates the proposed standards, taking into account the benefits of enhanced information for investors against the costs of implementing changes.”
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