Principal market price for crypto-assets: An accounting perspective

This article was written in collaboration between Digital Asset Research and RSM.

The crypto-assets industry presents unique challenges when applying traditional accounting standards. Crypto-assets, typically classified as intangible assets, are measured at cost less impairment. This classification could result in an inaccurate representation of a crypto-asset’s true market value as of the reporting date, as any subsequent increase to the impaired value can only be recognized upon derecognition of the crypto-asset, for example through a sale. This prescribed method of accounting has prompted industry leaders to push for a new accounting standard.

On Dec. 13, 2023, the Financial Accounting Standards Board (FASB) approved a shift from cost less impairment to fair value measurement for certain crypto-assets (ASU 2023-08, subtopic 350-60). The standard went into effect for fiscal years beginning after Dec. 15, 2024. For accounting practitioners, it is essential to understand the concept of principal market price (PMP) within the framework of Accounting Standards Codification (ASC) 820, Fair Value Measurement, specifically in the context of crypto-asset valuations.

The need to address PMP in the valuation of crypto-assets has become increasingly urgent due to the effective date of ASU 2023-08. While ASC 820 remains consistent, the valuation techniques currently employed must adapt to the characteristics of crypto-assets. PMP is a component of this, as it directly influences the valuation process for fair value reporting.

Core components of PMP related to ASC 820

ASU 2023-08 requires certain crypto-assets to be measured at fair value, departing from the approach which considered fair value only within the assessment of impairment. ASC 820 provides a comprehensive framework for determining fair value, including the identification of the principal market or, in its absence, the most advantageous market.

The principal market for a crypto-asset is the market with the greatest volume and level of activity that the reporting entity can access. If a principal market is not identifiable, the reporting entity should use the most advantageous market, which is the market that maximizes the amount that would be received to sell the crypto-asset. When a reporting entity normally transacts through an intermediary or a broker, that market would generally be considered the principal market unless evidence has been obtained that another market has a greater volume and level of activity; however, as nonexchange markets often present limited transparency regarding volume and pricing, such evidence may be difficult to obtain.

Challenges in determining PMP for crypto-assets

1. Exchange accessibility and market selection: In accordance with ASC 820, reporting entities should only consider markets they can access when determining PMP. Price aggregators cannot be utilized, as these are not markets in which a transaction would typically take place. Regarding derivatives and other complex financial instruments related to crypto-assets, PMP involves analyzing which markets provide the most relevant and reliable pricing information in conjunction to considering the liquidity and availability of these derivative products.
   
   
2. Exchange reliability and price quality: The reliability and transparency of pricing data may vary significantly across crypto-asset exchanges. Utilizing prices from exchanges with questionable reliability can lead to inaccurate fair value assessments. Reporting entities must therefore evaluate the quality of data sources when determining PMP. This is inclusive of, but not limited to, analyzing the exchange’s history of operations, regulatory oversight, security and reporting practices. If a reporting entity determines that data provided by a market is not reliable, it should not place weight on the data.
   
   
3. Decentralized exchange (DEX) considerations: Unlike centralized platforms, DEX operations vary by application. As such, their liquidity and transaction mechanisms/quotes can differ significantly. When determining PMP, reporting entities must decide whether to incorporate DEX data, which may involve pricing crypto-assets that are listed exclusively on DEXs. Each additional DEX utilized to determine PMP adds complexities as DEXs often have lower liquidity and higher volatility. Additionally, the decentralized nature of DEXs can make it difficult to assess the reliability and consistency of the data, requiring careful consideration of how DEX-only listings influence the overall fair value determination.
   
   
4. Cross-pair trading and market depth: Crypto-assets frequently trade against a variety of fiat currencies and other crypto-assets. The use of trading pairs (for example, bitcoin to U.S. dollar coin/BTC-USDC or BTC to Ethereum/BTC-ETH) may significantly influence PMP determination, as each pair possesses different levels of liquidity and depth and, consequently, the reported fair value.
   
   
5. Price relevance: If an orderly transaction occurs in an active market that is not the principal market and is an identical instrument, the transaction may require market participant adjustments to arrive at a PMP consistent with the reporting entity’s principal market. If the orderly transaction occurs in an inactive market, the reporting entity would consider the price, but the amount of weight placed thereon would be a matter of judgment. Transactions that are not orderly should carry little to no weight, while those for which orderliness cannot be determined, may be supplemented with other valuation inputs. In all cases, the use of observable inputs should be maximized and unobservable inputs minimized when developing fair value estimates. 
    

Recommendations for practitioners

As organizations adopt regulations and refine best practices, there are several ways practitioners can be proactive in keeping up with these changes:

1. Engaging with the industry: Active collaboration between practitioners and regulators should involve discussions to contribute to the development of consensus on PMP determination under ASC 820.
   
   
2. Monitoring regulatory changes: Crypto-asset regulations are constantly evolving. Practitioners should continuously monitor these changes to ensure that fair value reporting remains accurate and compliant with the most recent standards.
   
   
3. Using diverse market data: Practitioners should consider utilizing data from a wide range of exchanges, including both centralized and decentralized platforms, to capture a comprehensive view of market activity when determining PMP.
   
   
4. Utilizing software tools for PMP analysis: In-depth analysis of PMP can be complex and resource intensive. Practitioners should consider leveraging software tools that provide comprehensive analysis and data aggregation to assist in the determination of PMP.
   
   
5. Developing robust valuation policies: Reporting entities should establish clear, documented policies for PMP determination, including criteria for exchange selection. Policies should also address potential manipulation risks. Such policies are vital for audit readiness and regulatory compliance.

As crypto-asset valuation becomes more integrated into established accounting frameworks, determining the principal market remains a difficult task that requires rigorous analysis. The dynamic nature of crypto-asset markets demands that reporting entities adopt flexible and well-documented approaches to PMP determination.