Mark T Uyeda, Commissioner of the US Securities and Exchange Commission (SEC), put the focus firmly on accounting standards during his keynote address at Chartered Accountants’ Hall last week – the only speech he delivered during his visit to the UK.
“The IFRS Foundation and its trustees must not lose sight of the importance of accounting standard setting and must ensure that the IASB receives the time, resources, and attention needed for its critical mission,” he told the audience.
When the IFRS Foundation proposed to create the International Sustainability Standards Board (ISSB) in early 2021, Uyeda’s fellow SEC Commissioner Hester Peirce outlined her concerns. One of these was the ISSB’s potential drain on resources at the expense of the International Accounting Standards Board (IASB).
The ISSB is now in its second year of existence and published the exposure drafts for its first two standards in March last year. “As the ISSB works towards finalising these two standards, the concerns voiced by Commissioner Peirce apply as much today as they did two years ago,” said Uyeda.
An important aspect of quality accounting standard setting is updating and improving standards over time, especially in response to evolving financial transactions and practices, Uyeda said. In the US, the Financial Accounting Standards Board (FASB) is tasked with maintaining US GAAP.
FASB is currently working on several updates to standards, including accounting for and disclosure of certain crypto assets held by entities. “There has been a strong push in the past few years to ensure that regulations keep pace with the growth of the crypto industry and that regulatory emphasis has intensified since the collapse of FTX late last year,” said Uyeda. “FASB’s effort to update its standard on the measurement, presentation and disclosure of crypto assets is a part of these efforts.”
FASB issued its exposure draft for the updated standard in March 2023. The proposed update would add a new subtopic covering certain crypto assets to ASC 350, which governs accounting for intangible assets.
Under US GAAP, if an entity holds third-party crypto assets meeting certain criteria, it accounts for those assets as indefinite-lived intangible assets. This is subject to certain industry specific exceptions. Entities cannot amortise these assets over time.
If a crypto asset’s fair value falls below its carrying amount, the entity must write down or impair the asset to its fair value. The impairment cannot be reversed, even if the fair value subsequently increases. An entity would not recognise any increase in the value of its crypto assets until they are sold.
FASB proposed amendments that would instead require entities to measure certain crypto assets at fair value. These would be presented separately on the balance sheet, apart from other intangible assets. In that case, any increase or decrease to fair value during an accounting period would be recognised as part of the net income for that period and would be reported separately on the income statement. Transaction costs to acquire a crypto asset, such as commissions and other fees, would be expensed as incurred, unless permitted to be capitalised.
“There will likely be different perspectives on FASB’s proposed updates,” said Uyeda. “Some may agree that the proposed update better reflects the economics of holding certain crypto assets, while others may prefer the current accounting model. Many may believe that change is needed, but do not agree with every aspect of the proposed update.”
Uyeda commended FASB’s efforts in updating the standard. The FASB is currently soliciting public feedback on its proposed updates. If this update is adopted, it is likely to bring US GAAP closer to the IFRS approach to accounting for some crypto assets.
Under IFRS IAS 38, entities have the option of reporting crypto assets with an active market based on a revaluation model. Under this approach, an entity records a crypto asset on its balance sheet at fair value, similar to FASB’s proposed standard. There are some differences between IAS 38’s revaluation model and FASB’s proposal, such as the revaluation model being elective and not mandatory, or the need for an active market for the crypto asset to use the revaluation model. “Given FASB’s proposed update and the growth of crypto assets, I am hopeful that the IASB is also evaluating whether there should be updates to IFRS on the accounting for crypto assets,” Uyeda said.
However, there will always be errors and noncompliance no matter how good the standard, he said. He shared some statistics for the SEC’s accounting and auditing-related enforcement actions in the year ending 30 September 2022. In that year, the SEC initiated 68 enforcement actions, which was a 55% increase on the previous financial year, but below pre-pandemic levels.
“Only five of the 68 actions were against non-US respondents, which, on a percentage basis, was less than prior fiscal years. The most common violations were revenue recognition, in 30 actions, and internal control over financial reporting, in 28 actions.”
Of the 68 actions, 36 were against individuals only and did not involve a firm, Uyeda said. “This represented 53% of the actions and was significantly higher than the five prior fiscal years, which averaged 37%. Finally, during the last fiscal year, 38 individuals resolved their case with the agency and were assessed civil penalties in a median amount of $20,000. Twenty-seven firms resolved their case and incurred civil penalties in a median amount of $1.8m.”
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