In October 2022, the Financial Accounting Standards Board (FASB) issued preliminary guidance that bitcoin should be valued at it’s “fair market value” on a company’s balance sheet. The article below gives the highlights, but I wanted to take a few minutes to address some questions bitcoiners might have regarding this change.
- What is “fair market value”?
Fair market value is simply the value an asset could be sold or exchanged for at a set date and time. You can think of this as the price per bitcoin that you see on your favorite bitcoin exchange.
- Was this a surprise?
No, not to me at least. An asset as liquid as bitcoin that trades 24/7 is easy to value at any point in time. Valuing it at the USD exchange rate has been the obvious choice for at least 5 years now.
- Will this affect Bitcoin corporate adoption?
Maybe, that is yet to be seen. If there were public companies out their that wanted to buy bitcoin, but were concerned investors would unfairly judge their balance sheets because of the previous treatment, then that hurdle has now been removed.
- When does the change go into effect?
The new guidance is actually still preliminary at this point, so no date has been set to implement this change. Given that we are already in Q4, the earliest I can imagine this being implemented would be Q1 2023.
Going back to #3, this also means I wouldn’t expect any big announcement of corporate buys until the new guidance is active.
- What is FASB and why are they deciding how bitcoin is valued?
FASB is a private organization that is responsible for setting and reviewing Generally Accepted Accounting Principles in the US. While the FASB doesn’t have any strict authority, the SEC has historically relied on it’s judgement when enforcing accounting standards.
- Will this change have an effect on global adoption?
Not directly. As I noted above FASB, only covers US GAAP and global adoption seems to be doing just fine without accountants getting in the way.
- How does this change affect bitcoin’s use as a method of payment/currency?
No effect, the FASB ruling is really focused on bitcoin as an investment asset. If/when bitcoin is used as the primary medium of exchange AND unit of exchange for a US company, FASB will need to take another look at this.
- How does this affect taxes owed on bitcoin gains?
No effect. Companies will record unrealized gains or losses based on the fluctuation in the bitcoin price, but taxes are going to be owed only when the company sells or spend bitcoin. The rules around the tax treatment of bitcoin are going to continue to be governed by the IRS, not FASB or the SEC.
- How was bitcoin treated before?
Previously, it was labeled as an “intangible asset” which doesn’t sound terrible, until you realize what other assets are grouped in this category and how that affects their treatment.
An example of another intangible asset is Goodwill. Goodwill is essentially the premium that one company pays for another during an acquisition. The Goodwill associated with an acquisition is valued at the time of purchase and can only be decreased (called an impairment), never increased.
This treatment seems reasonable given that once that company/brand is absorbed into a new entity the value it creates will be reflected in the income statement of the new entity and over time the value of the old company will be more and more a result of decisions of the acquirer.
If you think the scenario above doesn’t sound anything like bitcoin, I agree. It was always a misguided approached based on ignorance of what bitcoin is. The good news is that bitcoin is finally at the point where the accounting profession had to get educated.
If you can’t get enough of this of this topic below is a link to the FASB zoom call where they discussed the topic of how to value bitcoin. It is very clear that once these board members spent just a little bit of time actually trying to understand the topic, the answer was very obvious.
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