The SEC recently released Staff Accounting Bulletin (SAB) No. 121, which includes interpretive recognition, measurement and disclosure guidance for entities to consider when they have obligations to safeguard crypto-assets held for their platform users.
Per SAB 121, if an entity is responsible for safeguarding the crypto-assets held for its platform users, including maintaining the cryptographic key information necessary to access the crypto-assets, the entity should present a liability on its balance sheet to reflect its obligation to safeguard the crypto-assets held for its platform users. The SEC staff believes it would be appropriate to measure this safeguarding liability at initial recognition and each reporting date at the fair value of the crypto-assets the entity is responsible for holding for its platform users.
The staff also believes it would be appropriate for the entity to recognize an asset at the same time that it recognizes the safeguarding liability, measured at initial recognition and each reporting date at the fair value of the crypto-assets held for its platform users. The asset recognized is similar in nature to an indemnification asset as described in Topic 805, “Business Combinations,” of the Financial Accounting Standards Board’s Accounting Standards Codification (ASC). The measurement of the asset is on the same basis as the crypto-asset safeguarding liability assumed by the entity. The asset recognized by the entity is separate and distinct from the crypto-asset itself that has been transferred to and then held for the platform user.
Further, in light of the significant risks and uncertainties associated with safeguarding crypto-assets, including the risks of loss associated with holding the cryptographic key information necessary to secure and transact in the crypto-asset, the SEC staff believes the entity’s notes to the financial statements should include:
- Clear disclosure of the nature and amount of crypto-assets the entity is responsible for holding for its platform users, with separate disclosure for each significant crypto-asset, and the vulnerabilities the entity has due to any concentration in such activities
- Disclosures regarding fair value measurements in accordance with ASC 820, “Fair Value Measurement”
- A description of the accounting for the liabilities and corresponding assets. In providing these disclosures, the entity should consider disclosure about who holds the cryptographic key information, maintains the internal recordkeeping of those assets and is obligated to secure the assets and protect them from loss or theft.
Disclosures regarding the significant risks and uncertainties associated with the entity holding crypto-assets for its platform users may also be required outside the financial statements under existing SEC rules, such as in the description of business, risk factors, or management’s discussion and analysis of financial condition and results of operation. As part of this disclosure, the entity also should consider including, to the extent material, information about risk-mitigation steps the entity has put in place.
The SAB 121 guidance is expected to be applied by an entity that files reports pursuant to Section 13(a) or Section 15(d) of the Exchange Act, or an entity required to file periodic and current reports pursuant to Rule 257(b) of Regulation A, no later than its financial statements covering the first interim or annual period ending after June 15, 2022, with retrospective application as of the beginning of the fiscal year to which the interim or annual period relates.
Also, the SEC staff expects all other entities, including, but not limited to, entities conducting an initial registration of securities under the Securities Act or Exchange Act, entities conducting an offering of securities under Regulation A, and private operating companies entering into a business combination transaction with a shell company, including a special purpose acquisition company, to apply the guidance in SAB 121 beginning with their next submission or filing with the SEC (e.g., the initial or next amendment of the registration statement, proxy statement, or Form 1-A), with retrospective application, at a minimum, as of the beginning of the most recent annual period ending before June 15, 2022, provided the filing also includes a subsequent interim period that also reflects application of the guidance. If the filing does not include a subsequent interim period that also reflects application of the guidance, the staff expects it to be applied retrospectively to the beginning of the two most recent annual periods ending before June 15, 2022.
For all entities, in the financial statements that reflect the initial application of this guidance, the effect of the initial application should be reported in the carrying amounts of assets and liabilities as of the beginning of the annual period specified above. Entities should include clear disclosure of the effects of the initial application of this guidance.