The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) No. 122 to rescind SAB 121, which provided guidance on accounting for obligations to safeguard crypto-assets that an entity holds for platform users. SAB 121 defined the term “crypto-asset” as a digital asset that is issued and (or) transferred using distributed ledger or blockchain technology using cryptographic techniques.
The SEC staff previously issued SAB 121 to address the risks and uncertainties related to entities that allow platform users to transact in crypto-assets. These entities often provide services that obligate them (or their agents) to safeguard users’ crypto-assets.
SAB 121 stated that 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. SAB 121 also noted that an entity should 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. It also stated that the notes to the financial statements should include clear disclosure of the nature and amount of crypto-assets that the reporting entity is responsible for holding for its platform users, with separate disclosure for each significant crypto-asset, and the vulnerabilities it has due to any concentration in such activities.
In SAB 122, the SEC staff has clarified that an entity that is responsible for safeguarding crypto-assets for others should determine how to account for any liability related to the risk of loss under such an obligation by applying the recognition and measurement requirements from Accounting Standards Codification (ASC) Subtopic 450-20, Loss Contingencies, or International Accounting Standard (IAS) 37, Provisions, Contingent Liabilities and Contingent Assets, under U.S. generally accepted accounting principles or International Financial Reporting Standards, respectively.
SAB 122 notes that entities should continue to consider existing requirements to provide disclosures that allow investors to understand an entity’s obligation to safeguard crypto-assets held for others. It explicitly notes that these requirements include, but are not limited to: Items 101, 105 and 303 of Regulation S-K; ASC 450-20 (or IAS 37); and ASC 275, Risks and Uncertainties (or IAS 1, Presentation of Financial Statements).
Entities are required to apply SAB 122 on a retrospective basis for annual periods beginning after December 15, 2024. Early application is permitted in any interim or annual period included in SEC filings after January 30, 2025. Entities should include clear disclosure of the effects of a change in accounting principles upon initial application of this rescission.
