FASB Delves Into Sensible Token Classification

The Financial Accounting Standards Board (FASB) is seeking feedback on its proposed treatment regarding the accounting for and disclosure of a narrow category of crypto assets. The proposed Accounting Standards Update (ASU) is intended to improve information provided to investors about a company’s crypto asset holdings.

Comments are due June 6 and may be submitted through the website or emailing comments to director [at] fasb [dot] org, File Reference No. 2023-ED200.

The ASU sets forth the accounting treatment for the class of crypto assets that meet the following criteria:

  • Are intangible assets;
  • Do not provide the asset holder with enforceable rights to, or claims on underlying goods, services, or other assets;
  • Are created on or reside on a blockchain;
  • Are secured through cryptography;
  • Are fungible; and
  • Are not created or issued by the reporting entity or its related parties.

Sound familiar?

This follows the principles discussed in the sensible token classification system and in particular the class called “native DLT tokens”!

The IRS also recently discussed token classification. See our note on the guidance release, available here. Owl Explains is elated by these developments because proper token classification is Branch 3 of our Tree of Web3 Wisdom.

Under the ASU, reporting entities would need to measure at fair value changes in net income associated with this class of asset during each reporting period. Meanwhile, transaction costs related to acquiring this type of crypto asset, such as fees and commissions, would be recognized as an expense as incurred absent industry-specific guidance that the reporting entity capitalize those costs.

The ASU would also require these crypto assets to be presented separately from other intangible assets (whether tokenized or traditionally represented) on a reporting entity’s balance sheet and changes in the fair market value of crypto assets would be separate from changes in the carrying amounts of other intangible assets in the income statement. Further, if this type of crypto assets are received as noncash consideration in the ordinary course of business and they are almost immediately converted into cash (i.e., as payment for goods and services), then the entity would be required to classify those cash receipts for goods and services paid in crypto assets as cash flows from operating activities. The ASU also lists the information that would need to be disclosed with respect to crypto asset holdings.

Notably, based on these criteria, NFTs would likely be excluded from the ASU since NFTs often provide holders with certain rights to goods and services and they are not fungible, as opposed to fungible crypto assets that are used for general purposes on a blockchain.

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At Owl Explains, we collaborate with trade associations, think tanks, policymakers, and industry partners to further understanding of blockchain, crypto, and Web3.

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