Fair Value Accounting in Crypto
Accuracy is crucial when it comes to accounting, and Fair Value accounting has gained traction particularly when accurately accounting for crypto assets. Fair Value is the estimated price at which an asset would be bought or sold when both the buyer and seller freely agree on a price (Source: Investopedia).
The Financial Accounting Standards Board (FASB), announced that companies should use fair-value accounting for measuring bitcoin and other crypto assets. Due to no specific accounting rules, crypto assets are classified as indefinite-lived intangible assets similar to intellectual property such as trademarks (Source: WSJ). This is why fair value accounting is believed to best capture the economics of crypto assets. Fair value accounting recognises the current gains or losses on particular assets by taking into account the most recent market value. This helps paint a more accurate picture of the financial position of the company, avoiding potentially large variations when a particular asset is discharged.
Crypto-assets can present particular challenges when it comes to fair value accounting, due to:
Lack of data: Some tokens are not widely traded and it is difficult to get the spot price for them.
Illiquidity: Assets such as individual NFTs or project tokens are illiquid, and it is often difficult to estimate a fair market value for them.
Complexity: Some crypto assets, such as NFTs representing DeFi positions can be complex to value, as you would need to track the value of underlying pools and vaults that the assets are locked in.
At Mensari we help automate fair-value accounting for crypto-assets, and have tried to address some of the outlined challenges. We have partnered with multiple trusted data providers such as Kaiko and CoinMarketCap to ensure that our asset pricing is as accurate as possible. We allow flexibility around pricing, with the ability to manually price transactions and choose price granularity. Our customers can get pricing at Daily, hourly or minute pricing intervals.
We are also able to track NFTs and get the current floor price of a particular collection, with a full NFT accounting module coming soon. Similarly we allow for DeFI accounting, and are tracking multiple pools across various protocols including Uniswap, Curve and Balancer.
For instance, One Bitcoin (BTC) is used to buy Five Ripple (XRP). The first step is to identify the date of purchase of that one BTC and its Fair Market Value at the time that the XRP is purchased.
When the BTC is converted to XRP, that counts as a discharge of the asset. We have to record a gain in value between date of purchase and date of sale of the Bitcoin, and record $20,000 as the cost basis for the investment in the 5 XRP on 01/02/23. Between the BTC purchase date and the BTC sell date, we should have been computing the mark-to-market regularly and the gain would not come as a massive jump on the income statement.
The acquired price of 5 XRP is $20,000 because that was the fair market value of BTC when it was exchanged for 5 XRP. Depending on the market and when we decide to discharge the XRP another gain/loss is to be made depending on the fair market values of the assets at the time.
To conclude, Fair value accounting has become increasingly important when dealing with crypto assets. This is due to the unique challenges such as lack of data, illiquidity and complexity. By adopting fair value accounting practices, companies can be more accurate when capturing the economics of these assets and provide a clearer picture of their financial position.
At Mensari, we help automate fair-value accounting for crypto-assets. To find out more book a demo with us or Sign up for free and try it for yourself.