Principal Market Identification and Beyond
Updated October 2022
Author: Suzanne Morsfield, Global Head of Accounting Solutions in Data & Analytics
The FASB just approved fair value accounting for specific crypto assets – Lukka’s ready, are you?
In its October 12, 2022 meeting the Financial Accounting Standards Board (FASB) voted unanimously to require fair value accounting for specific types of crypto assets. While this requirement may be new to some, Lukka has been rigorously supporting this accounting methodology for years, enabling its customers to pass their audits, whether they are striking NAV, marking to market, or testing for impairment. Underneath the hood of our fair value methodology is a foundation of high-quality data and a classification system that permits customers to further understand the types of crypto assets they are considering or are already holding–further, our data classification system allows us to help you assess whether a particular crypto asset is likely to be within scope for the new fair value requirement. And, for any crypto assets that are not within scope, Lukka’s impairment product facilitates daily, monthly, quarterly, or annual impairment testing and calculation at the push of a button.
Why do we need to talk about fair value for crypto assets?
The role of crypto assets in the global economy is both growing and evolving on an exponential scale. And whether a reporting entity (for-profit or not-for-profit) is simply holding these assets as investments, or using them in transactions, chances are the accounting concept of fair value will be applicable at some point in their financial reporting year. It is important to talk about fair value accounting because this accounting concept, and its measurement, can be mandatory for elements of a reporting entity’s financial statements and related disclosures. The requirement may be relevant for financial statement items that everyone recognizes, such as investments in publicly-traded securities; it can be equally important for the ongoing accounting valuation of items like a company’s trademarks or its crypto assets.
In a nutshell, fair value is a measurement approach that defines what to include or not in the reported amount of an asset in a company’s financial statements. However, it generally is not the same valuation as that performed by sell-side analysts. For accounting purposes, fair value measurement typically resides on a continuum–on one end there may be a relatively precise measure, driven by observable prices from a public exchange, and on the other end may be an estimation consisting of a model with inputs that are not publicly available.
Regardless of where fair value falls on the continuum, the exact measurement of it, as discussed here, is confined by the guardrails put in place by global accounting standard-setters and regulators. Sometimes this guidance is very prescriptive, and other times, it may offer only principles. But, in all cases, reporting entities usually will need to find a path through the accounting fair value framework if they hold or use crypto assets. The discussion that follows provides some insights into that journey.
Can crypto assets be reliably valued under existing accounting standards?
This question has been puzzling to many in the financial reporting community, some of whom may wonder if the only way to value actively-traded crypto assets is by paying for custom valuation reports for each asset held or traded. The reasons for asking are valid and worth discussing. Lukka Prime answers these questions for actively-traded crypto assets with an institutional grade, AICPA SOC-certified, off-the-shelf, reasonably-priced commercial software product aligned with ASC 820 (US GAAP) and IFRS 13 (international). Its 5-step methodology has been reviewed and over the years used by top-tier academics, financial, accounting, and audit professionals.
Just how challenging is the crypto ecosystem for financial reporting?
Among other statistics that illustrate the vastness and complexity of the crypto ecosystem, Lukka’s Reference Data product comprises:
- 348+ Data Sources (e.g., exchanges, OTC desks, pricing sources)