Plug Power surprised investors with a “going concern”
warning in a recent
. CEO Andy Marsh sees the added language as an “accounting technicality” and is plotting a way forward for his hydrogen-technology company.
The United States Financial Accounting Standards Board has unanimously approved rules for accounting for the fair value of companies’ cryptocurrency holdings, according to media reports. The rules will go into effect in 2025.
The FASB is the organization that sets accounting and reporting standards for organizations that follow U.S. Generally Accepted Accounting Principles (GAAP). It issued a call for comments on proposed changes to the FASB Accounting Standards Codification in March.
The proposal was discussed and put to a vote on Sept. 6.
Fair value is the estimated price of an asset that takes into account current market value and other decisive elements. The FASB had made a “tentative” decision on fair value accounting for crypto assets in October 2022.
Christmas came early for @saylor $MSTR and other companies with Bitcoin on their balance sheets!
FASB is moving to fair value reporting for Bitcoin holdings
Should @Swan host a livestream today to explain the implications?
— Cory Klippsten | Swan.com #Bitcoin (@coryklippsten) September 6, 2023
Previous practice required companies to keep impairment losses from crypto, caused when an asset suddenly loses value, on their balance sheets even after the digital asset regained its value.
Related: How to handle crypto trading gains and losses on your balance sheet
The new accounting method will increase volatility in the earnings of companies with large crypto holdings but allow them to record financial recoveries from increasing crypto prices. Companies can begin using fair-value accounting for their crypto immediately if they wish to. FASB member Christine Botosan said:
“It’s not very often that we can both take cost out of the system and improve the decision usefulness of information, and it makes it a really easy vote to do both of those.”
Besides crypto-native companies like Coinbase, the rule change will affect investment companies and companies like MicroStrategy and Tesla that hold large amounts of crypto. MicroStrategy chairman Michael Saylor wrote on X:
“Fair value accounting is coming to #Bitcoin. This upgrade to FASB accounting rules eliminates a major impediment to corporate adoption of $BTC as a treasury asset.”
To accommodate the changes, crypto will become a line item under “intangible assets” in financial accounts.
Magazine: How to protect your crypto in a volatile market: Bitcoin OGs and experts weigh in
The United States Securities and Exchange Commission’s (SEC) Commissioner Hester Peirce questioned why the regulator wants to discourage good-faith efforts to provide more transparency for the cryptocurrency industry in a July 27 tweet.
Peirce was reacting to a statement from the SEC chief accountant, Paul Munter, who warned that accounting firms acting as performing “audit” duties for crypto firms risk censure or suspension if their findings are misrepresented.
While Peirce conceded that crypto firms and their accountants should be clear on proof of reserve, she argued that the regulator should not discourage good-faith efforts to provide more transparency to the crypto scene.
SEC’s warning to accounting firms
According to a July 27 statement, Munter stated that any accounting firm whose clients make “material misstatements” about its “audit” scope risks legal liabilities, and it could be implicated in the antifraud provisions of the federal securities laws.
Munter wrote:
“As accounting firms increasingly engage in this sort of non-audit work, their clients’ marketing and terminology risks misleadingly suggesting that these alternative, non-audit arrangements are at parity with, or even more “precise” than, a financial statement audit. Such suggestions are false. Non-audit arrangements are neither as rigorous nor as comprehensive as a financial statement audit, and may not provide any reasonable assurance to investors.”
Munter stated that an accounting firm that becomes aware that a client has made misleading statements about the nature of its non-audit work “should consider making a noisy withdrawal, disassociating itself from the client, including by way of its public statements, or, if that is not sufficient, informing the Commission.”
The regulator’s accountant further advised accounting firms to maintain independence to bolster the integrity of the financial reporting system.
Following FTX’s collapse last year, several crypto firms immediately introduced a proof-of-reserve scheme that showed evidence of their crypto holdings. However, the system soon generated much criticism after several auditors, including Mazars and Armanino, dropped their crypto clients after the efficacy of their reports was questioned.
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The U.S. Securities and Exchange Commission (SEC) issued a stern warning to accounting firms on July 27, outlining the potential risks and liabilities of serving clients in the rapidly evolving crypto industry.
Paul Munter, Chief Accountant to the SEC, said that many crypto companies have wrongly stated that certain non-audit work is equivalent to an audit.
Munter wrote in his statement:
“… Clients’ marketing and terminology risks misleadingly suggesting that these alternative, non-audit arrangements are at parity with, or even more “precise” than, a financial statement audit. Such suggestions are false.”
He explained that accounting firms could be held responsible for their own statements and any incorrect statements made by their clients.
Munter said there are a “variety of facts and circumstances” under which auditing firms could be liable for violating antifraud provisions of securities regulation. He warned that such violations could cause the accounting firm and its members to be censured, reprimanded, or even suspended from appearing or practicing before the SEC.
Munter added that Office of the Chief Accountant (OCA) staff believe that accounting firms should make a “noisy withdrawal,” meaning breaking ties with dishonest crypto clients by making a public statement or informing the SEC.
He also suggested that auditing firms consider risks before taking on crypto clients, take precautions with existing clients that move into cryptocurrency, and set rules for how clients can describe their relationship with the auditor.
Crypto firms have trouble finding auditors
The warning is notable as certain accounting firms broke ties with the crypto sector in late 2022. Armanino and Mazars reportedly dropped crypto companies as clients in December. The Guardian also reported that Binance was unable to secure audits from the “Big Four” accounting firms, though some of those firms provide such services.
Those service denials were seemingly motivated by the then-recent failure of FTX. It is unclear what developments, if any, prompted the SEC’s latest warning.
More recent reports suggest that the problem remains. A Bloomberg survey from May suggested many crypto firms are unable to find major audit firms willing to serve them.
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