More and more American companies are embarking on NFTs despite the absence of accounting rules

More and more US companies are investing in non-fungible tokens, even though there are no specific accounting rules or disclosure requirements for them.

These tokens, or NFTs, are digital proofs of purchase for items such as artwork, baseball cards or digital music and can provide access to services such as live streamed concerts. NFTs are stored and exchanged on decentralized computer networks, or blockchains. Artist Kevin McCoy created in 2014 a pixelated animation of an octagon widely considered to be the first NFT.

NFT sales last year totaled $25.51 billion, up from $95.11 million in 2020, according to DappRadar, a blockchain analytics firm. This year, sales through March 10 have already surpassed last year’s total, at more than $27 billion.

NFTs are another digital asset – alongside bitcoin and Ethereum – for which US reporting rules do not specify how to account for or disclose. With securities regulators scrutinizing the cryptocurrency market and the US accounting standard setter studying certain digital assets, NFTs don’t seem to be a priority for either.

NFTs are harder to value than cryptocurrencies because they are not interchangeable, cannot be traded on exchanges, and tend to be treated the same as art or music, with their value being somewhat subjective, said Vivian Fang, associate professor of accounting at the University. of Minnesota.

The price of NFTs is not based on trades on a particular exchange, but rather on the level of supply or demand for the related market, for example basketball collectibles. “The price is not really comparable across markets,” Ms. Fang said.

Companies such as lifestyle company PLBY Group Inc.,

Hasbro toy maker Inc.,

online sports betting company DraftKings Inc.

and Coinbase Global cryptocurrency exchange Inc.

in recent months have integrated NFTs into their business, for example by creating NFTs for customer loyalty programs or by creating platforms to exchange them. Few of these companies have disclosed details in their regulatory filings, as they do not consider the value of the NFTs they bought or sold to be material to investors.

Visa payment services company Inc.

last August, he said he paid for an NFT using nearly $150,000 in Ethereum to better understand the market for these tokens. “We need a first-hand understanding of the infrastructure requirements for a global brand to buy, store and operate an NFT,” said Cuy Sheffield, chief crypto officer at Visa, in a blog post at the time. The San Francisco-based company, which did not mention the transaction in its latest annual report, declined to comment further.

Visa purchased CryptoPunk #7610 NFT using nearly $150,000 in Ethereum.


Photo:

Visa Inc.

Companies that buy and hold NFTs account for them as indefinite-lived intangible assets – similar to bitcoin, trademarks and website domains – based on non-binding guidelines from the Association of International Certified Professionals Accountants, a professional organization.

Under these guidelines, companies must review the value of assets at least once a year. Companies must write down the value if it falls below the purchase price, depending on the result of their annual impairment test. If the value increases, companies can only register a gain when they sell the assets.

PLBY, the Los Angeles-based company behind the Playboy brand, bought around $250,000 in NFTs last year. Accounting for NFTs as intangible assets does not accurately reflect the volatility of these tokens, said CFO Lance Barton. “The fact that you can’t mark it doesn’t really seem logical,” he said. Fair value accounting, in which companies immediately recognize losses and gains in value and treat NFTs as financial assets, would be more accurate, he said.

Last year, the company partnered with artists to create NFTs. He sold around 12,000 NFTs for $12 million. PLBY said it took a $1 million impairment charge related to its Ethereum and NFT holdings last year. The company reported net revenue of $246.6 million for 2021, up 67% from a year earlier. Companies that sell NFTs recognize the proceeds of the sale as revenue under US accounting standards

An NFT image in the Liquid Summer NFT collection by artist Slimesunday for Playboy.


Photo:

Playboy and Slimesunday

The Financial Accounting Standards Board does not intend to review the accounting or disclosure of NFTs, a spokeswoman said. The US accounting standard setter said in December it would conduct research on how to account for and disclose digital assets that do not carry ownership rights, such as cryptocurrencies.

The FASB’s research on digital assets will not cover NFTs because these digital assets typically have copyrights, the spokeswoman said. Ownership of an NFT may be subject to copyright protection. “We are always open to more comments on issues that we may consider addressing in the future,” the spokesperson said.

Accountants say the FASB should consider NFTs in its research and make potential new rules applicable to all types of assets. “Digital assets need to be bundled together and put in one bucket,” said Shripad Joshi, senior director of S&P Global Ratings, the ratings firm. “If the FASB decides to account for fair value for crypto, I don’t see why it would be anything much different.”

The Securities and Exchange Commission, led by Chairman Gary Gensler, is working to clarify rules for the roughly $2 trillion cryptocurrency market, though it is more focused on lending and trading platforms of crypto than on NFTs.

Last year, NFTs were mentioned in 14 letters between the SEC and companies or funds, compared to one letter in 2020, according to research firm Audit Analytics. In most cases, the SEC has asked companies to clarify statements about their NFT-related business plans in initial public offering filings. Its corporate finance division, which oversees corporate disclosure, often sends comment letters to public companies requesting information about their disclosures or accounting practices.

Investors watch what companies say about their NFT activities. NFTs were mentioned in 119 calls companies had with analysts so far this year through Friday, compared to 194 for all of 2021 and four in 2020, according to Sentieo Inc., a financial data firm. .

“If there are no barriers around these types of transactions, someone is forced to get creative or unknowingly report it in a weird way that is different from everyone else” said Jack Ciesielski, owner of RG Associates Inc., an investment and portfolio research firm. director.

The lack of specific NFT accounting rules will likely lead some companies to adjust US generally accepted accounting principles, or GAAP, and come up with non-GAAP measures to reverse their impairments, Ben Wechter said. analyst at Zion Research Group, an accounting and tax research firm.

“NFTs are here to stay and I don’t think companies will necessarily wait for the FASB to do the accounting before investing,” Wechter said.

Write to Mark Maurer at [email protected]

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