FASB makes progress on crypto asset transfers project

The Board has tentatively decided to expand the scope of ASC 350-60 to include crypto assets, such as those commonly referred to as ’wrapped tokens’ or ’receipt tokens’, that give the holder the right to receive another crypto asset that is in scope of ASC 350-60.

The Board has tentatively decided that lenders should not derecognize crypto intangible assets that they lend out but rather continue to account for them under ASC 350-60 and reclassify them as encumbered assets on the balance sheet. Those encumbered assets would be measured at their fair value, adjusted to reflect the borrower’s credit risk, throughout the life of the loan.

KPMG Observations:

• The Board has not yet decided what will constitute a lending transaction. Some Board members expressed support both for a narrow definition centered solely on transactions where an asset is transferred in exchange for an enforceable right of return and compensation and a definition that aligns with what crypto asset industry participants view as such.
• While a narrow definition would appear to include direct crypto intangible asset loans, it is unclear whether economically similar transactions, such as loans to a decentralized lending protocol or providing crypto assets to a liquidity pool, will qualify as ‘lending transactions’ or would instead be evaluated as crypto intangible asset transfer transactions. 

For all non-lending transfers of crypto intangible assets, the Board tentatively decided to:

• Affirm continued use of the ASC 606 control model to determine when a crypto intangible asset is transferred;
• Establish certain circumstances under which it would be appropriate to evaluate whether control has transferred from the transferor’s, instead of the transferee’s, perspective;
• Provide implementation guidance demonstrating how the control transfer indicators in ASC 606-10-25-30 apply to crypto intangible asset transfers; and
• State that none of the following rights held by a crypto intangible asset transferor would preclude control transfer (and therefore derecognition) of those assets:
  • a right to repurchase the assets at the then-prevailing market price if the crypto assets are substantially the same as those transferred and are readily available in the marketplace;
  • a right to receive back an equal or greater number of substantially the same assets if those assets are readily available in the marketplace; or
  • a right to receive a proportional share of a mix of assets from a pool whose relative composition may change outside the entity’s control.

KPMG Observations

• Guidance clarifying which repurchase or reacquisition rights do not preclude derecognition of transferred crypto intangible assets will provide important new insight into the application of ASC 606 repurchase agreement guidance to crypto intangible asset transfers. We expect this proposal, if adopted, would typically result in the transferor only recognizing either a receivable or any newly obtained crypto asset (e.g. a wrapped or receipt token) post-transfer.
• There remains an open question about the accounting that would apply to liquidity pool (or other similar) tokens received in such transfers that entitle the holder to receive a proportional share of a mix of crypto assets that includes at least one crypto intangible asset. If the pool to which the token gives the holder rights comprises only crypto intangible assets in the scope of ASC 350-60, we expect the token may also meet an expanded ASC 350-60 scope. By contrast, additional judgment may be needed if the pool comprises crypto intangible and crypto financial (or other) assets.
• We believe it is unclear if assessing control transfer from the transferor’s perspective will refer to assessing derecognition based on whether the transferor has ’lost control’ of the crypto asset instead of whether another entity has obtained control of that asset. If so, and depending on the final proposed wording, we believe this perspective shift could result in the derecognition of crypto assets in some scenarios where derecognition generally does not result presently.

The Board has tentatively decided to clarify within ASC 350-60 that all transfers of digital assets that meet the US GAAP definition of a financial asset are subject to ASC 860.

The Board has tentatively decided to amend ASC 350-60’s disclosure requirements, as follows:

• Illustrate that wrapped, and presumably receipt, tokens would be disclosed separately, if significant, from other crypto asset holdings;
• Illustrate disaggregation of significant crypto asset holdings to include assets that would be brought into the scope of ASC 350-60 by the Board’s crypto asset transfer decisions (e.g. encumbered crypto assets);
• Clarify that the ASC 350-60 disclosures should capture transfer restrictions related to staked tokens, wrapped tokens and loaned or otherwise encumbered crypto intangible assets; and
• Expand the existing rollforward disclosure examples to illustrate the effects of crypto intangible asset transfers, including the receipt of wrapped or receipt tokens.

The Board also tentatively decided to require entities to disclose additional details about their significant crypto asset holdings, including how they use those assets and information about risks or restrictions affecting an entity’s ability to use or access its crypto assets.