Author: Dr. Gerard (Rod) Brennan; Advisor for Lukka & Adjunct Professor Teaching Advanced Audit and Information Technology in the Rutgers Professional Accounting MBA Program; Rutgers Business School; Newark, New Jersey.
The author is writing on his own behalf and none of the statements should be attributed to Lukka or The Rutgers Business School.
The statements in this document should not be treated as legal, tax, or accounting advice. The document is intended to provide general information only. If a person would like such advice, they should seek professional advice with regard to their specific facts.
The statements in this document reflect guidance issued as of May 4th, 2020.
The recently proposed guidance from the SEC has important implications for the current valuation practice for many registrants preparing financial statements filed with the Commission. Registrants now have long-awaited additional guidance and clarity on asset valuation from the SEC that applies to most all asset classes including cryptocurrency.
Like other respected regulators in the US and abroad (e.g., FASB and IASB), the SEC has been mostly silent in providing specific codified or non-authoritative guidance on the appropriate accounting treatment of cryptocurrencies. Perhaps some topics can wait for specific guidance from regulators to catch up with current practice, but valuation is an area where cryptocurrencies need to quickly align with existing regulatory guidance for similar assets or have new specific guidance crafted to address the unique distinctive of this emerging asset class.
The area of valuation of cryptocurrencies is one that needs to align/be addressed now – as many funds and other qualified investment companies hold increasingly material balances in cryptocurrencies which must be valued on a regular basis to strike NAV, calculate gains, and losses from sales, etc. The SEC released on April 21, 2020, a proposed rule “2a-5” designed to update circa 1970 valuation guidance from the Commission to help funds address changes in the markets and types of assets (including new assets such as cryptocurrencies). This paper will consider some of the key implications of existing and proposed SEC guidance on the appropriate methods of fair value accounting under both FASB ACS-820 and IASB IFRS-13 for cryptocurrencies/crypto assets held by funds and related qualified investment companies.
New and Existing Valuation Guidance from the SEC/FASB:
The Investment Company Act of 1940 established the first real authoritative guidance for registered investment companies or business development companies (a “fund”) addressing a very different investment environment without many of the current unique investment instruments, some of which have emerged just in the past decade. While updates have been made, the Commission last addressed valuation practices under the Investment Company Act in a comprehensive manner in a pair of releases issued in 1969 and 1970. Since then, markets and fund investment practices have evolved considerably.2
Proposed rule 2a-5 April 2020 would require the performance of certain functions in order to determine fair value in good faith. These functions include, for example:
- Periodically assessing and managing material risks associated with fair value determinations, including material conflicts of interest;