Rule2022-07196
Staff Accounting Bulletin No. 121
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
April 11, 2022
Effective
April 11, 2022
Issuing agencies
Securities and Exchange Commission
Abstract
This staff accounting bulletin expresses the views of the staff regarding the accounting for obligations to safeguard crypto- assets an entity holds for platform users.
Full Text
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<title>Federal Register, Volume 87 Issue 69 (Monday, April 11, 2022)</title>
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[Federal Register Volume 87, Number 69 (Monday, April 11, 2022)]
[Rules and Regulations]
[Pages 21015-21018]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2022-07196]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 211
[Release No. SAB 121]
Staff Accounting Bulletin No. 121
AGENCY: Securities and Exchange Commission.
ACTION: Publication of staff accounting bulletin.
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SUMMARY: This staff accounting bulletin expresses the views of the
staff regarding the accounting for obligations to safeguard crypto-
assets an entity holds for platform users.
DATES: Effective April 11, 2022.
FOR FURTHER INFORMATION CONTACT: Karmen Ward, Professional Accounting
Fellow, Office of the Chief Accountant at (202) 551-5300, or Todd E.
Hardiman, Associate Chief Accountant, Division of Corporation Finance
at (202) 551-3400, Securities and Exchange Commission, 100 F Street NE,
Washington, DC 20549.
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SUPPLEMENTARY INFORMATION: The statements in staff accounting bulletins
are not rules or interpretations of the Commission, nor are they
published as bearing the Commission's official approval. They represent
staff interpretations and practices followed by the staff in the
Division of Corporation Finance and the Office of the Chief Accountant
in administering the disclosure requirements of the federal securities
laws.
Dated: March 31, 2022.
J. Matthew DeLesDernier,
Assistant Secretary.
Accordingly, Part 211 of Title 17 of the Code of Federal
Regulations is amended as follows:
PART 211--INTERPRETATIONS RELATING TO FINANCIAL REPORTING MATTERS
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1. The authority citation for 17 CFR 211 continues to read as follows:
Authority: 15 U.S.C. 77g, 15 U.S.C. 77s(a), 15 U.S.C. 77aa(25)
and (26), 15 U.S.C. 78c(b), 15 U.S.C. 78l(b), 15 U.S.C. 78m(b), 15
U.S.C. 80a-8, 15 U.S.C. 80a-29(e), 15 U.S.C. 80a-30, and 15 U.S.C.
80a-37(a).
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2. Amend the table in subpart B by adding an entry for Staff Accounting
Bulletin No. 121 at the end of the table to read as follows:
Subpart B--Staff Accounting Bulletins
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Subject Release No. Date Fed. Reg. vol. and page
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Publication of Staff Accounting SAB121 April 11, 2022.................. [INSERT FEDERAL REGISTER
Bulletin No. 121. CITATION].
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Note: The text of Staff Accounting Bulletin No. 121 will not
appear in the Code of Federal Regulations.
Staff Accounting Bulletin No. 121
The staff hereby adds Section FF to Topic 5 of the Staff Accounting
Bulletin Series. This staff accounting bulletin (``SAB'') adds
interpretive guidance for entities to consider when they have
obligations to safeguard crypto-assets held for their platform users.
This SAB is applicable to entities that file reports pursuant to
Sections 13(a) or 15(d) of the Securities Exchange Act of 1934
(``Exchange Act'') and entities that have submitted or filed a
registration statement under the Securities Act of 1933 (``Securities
Act'') or the Exchange Act that is not yet effective. The SAB is also
applicable to entities submitting or filing an offering statement or
post-qualification amendment thereto under Regulation A, entities
subject to the periodic and the current reporting requirements of
Regulation A, and private operating companies whose financial
statements are included in filings with the SEC in connection with a
business combination involving a shell company, including a special
purpose acquisition company. Accordingly, the staff hereby amends the
Staff Accounting Bulletin Series as follows:
* * * * *
Topic 5: Miscellaneous Accounting
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The interpretations in this SAB express views of the staff
regarding the accounting for entities that have obligations to
safeguard crypto-assets held for their platform users.\1\ In recent
years, the staff has observed an increase in the number of entities
that provide platform users with the ability to transact in crypto-
assets. In connection with these services, these entities and/or their
agents may safeguard the platform user's crypto-asset(s) and also
maintain the cryptographic key information necessary to access the
crypto-asset. The obligations associated with these arrangements
involve unique risks and uncertainties not present in arrangements to
safeguard assets that are not crypto-assets, including technological,
legal, and regulatory risks and uncertainties. Specifically:
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\1\ This SAB expresses no view with respect to any other
questions that these activities may raise for any of the entities
involved, including the applicability of the registration or other
provisions of the federal securities laws or any other federal,
state, or foreign laws.
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<bullet> Technological risks--there are risks with respect to both
safeguarding of assets and rapidly-changing crypto-assets in the market
that are not present with other arrangements to safeguard assets for
third parties;
<bullet> Legal risks--due to the unique characteristics of the
assets and the lack of legal precedent, there are significant legal
questions surrounding how such arrangements would be treated in a court
proceeding arising from an adverse event (e.g., fraud, loss, theft, or
bankruptcy); and
<bullet> Regulatory risks--as compared to many common arrangements
to safeguard assets for third parties, there are significantly fewer
regulatory requirements for holding crypto-assets for platform users or
entities may not be complying with regulatory requirements that do
apply, which results in increased risks to investors in these entities.
These risks can have a significant impact on the entity's
operations and financial condition. The staff believes that the
recognition, measurement, and disclosure guidance in this SAB will
enhance the information received by investors and other users of
financial statements about these risks, thereby assisting them in
making investment and other capital allocation decisions.
FF. Accounting for Obligations To Safeguard Crypto-Assets an Entity
Holds for Its Platform Users
Facts: Entity A's \2\ business includes operating a platform that
allows its users to transact in crypto-assets.\3\ Entity A also
provides a service where it will safeguard the platform users' crypto-
assets,\4\ including maintaining the cryptographic key information \5\
necessary to access the crypto-assets. Entity A also maintains internal
recordkeeping of the amount of crypto-assets held for the benefit of
each platform user. Entity A secures these crypto-assets and protects
them from loss or theft, and any failure to do so exposes Entity A to
significant risks, including a risk of financial loss. The platform
users have the right to request that Entity A transact in the crypto-
asset on the user's behalf (e.g., to sell the crypto-asset and provide
the user with the fiat currency (cash) proceeds associated with the
sale) or to transfer the crypto-asset to a digital wallet for which
Entity A does not maintain the cryptographic key information.
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However, execution and settlement of transactions involving the
platform users' crypto-assets may depend on actions taken by Entity A.
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\2\ References throughout this SAB to ``Entity A'' are inclusive
of the entity as well as any agent acting on its behalf in
safeguarding the platform users' crypto-assets.
\3\ For purposes of this SAB, the term ``crypto-asset'' refers
to a digital asset that is issued and/or transferred using
distributed ledger or blockchain technology using cryptographic
techniques.
\4\ The service may be provided by Entity A or by an agent
acting on Entity A's behalf.
\5\ The guidance in this SAB is applicable regardless of whether
the cryptographic key remains in the name of the platform user or is
in the name of the Entity.
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Question 1: How should Entity A account for its obligations to
safeguard crypto-assets held for platform users?
Interpretive Response: The ability of Entity A's platform users to
obtain future benefits from crypto-assets in digital wallets where
Entity A holds the cryptographic key information is dependent on the
actions of Entity A to safeguard the assets. Those actions include
securing the crypto-assets and the associated cryptographic key
information and protecting them from loss, theft, or other misuse. The
technological mechanisms supporting how crypto-assets are issued, held,
or transferred, as well as legal uncertainties regarding holding
crypto-assets for others, create significant increased risks to Entity
A, including an increased risk of financial loss.\6\ Accordingly, as
long as Entity A 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 staff believes
that Entity A should present a liability on its balance sheet to
reflect its obligation to safeguard the crypto-assets held for its
platform users.
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\6\ See generally Report of the Attorney General's Cyber Digital
Task Force: Cryptocurrency Enforcement Framework (Oct. 2020), at 15-
16, available at <a href="https://www.justice.gov/ag/page/file/1326061/download">https://www.justice.gov/ag/page/file/1326061/download</a>.
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As Entity A's loss exposure is based on the significant risks
associated with safeguarding the crypto-assets held for its platform
users, the staff believes it would be appropriate to measure this
safeguarding liability at initial recognition and each reporting date
at the fair value \7\ of the crypto-assets that Entity A is responsible
for holding for its platform users. The staff also believes it would be
appropriate for Entity A to recognize an asset \8\ 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.\9\
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\7\ For U.S. generally accepted accounting principles (``U.S.
GAAP''), refer to glossary definition provided in Financial
Accounting Standards Board (``FASB'') Accounting Standards
Codification (``ASC'') Topic 820. For International Financial
Reporting Standards (``IFRS''), refer to glossary definition
provided in IFRS 13.
\8\ The asset recognized is similar in nature to an
indemnification asset as described in FASB ASC 805 and IFRS 3. 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.
\9\ Similar to the guidance in FASB ASC 805 and IFRS 3, Entity A
would need to evaluate whether any potential loss events, such as
theft, impact the measurement of the asset.
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Question 2: Assume the same facts as Question 1. What disclosures
would the staff expect Entity A to provide regarding its safeguarding
obligations for crypto-assets held for its platform users?
Interpretive Response: 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 staff
believes the notes to the financial statements should include clear
disclosure of the nature and amount of crypto-assets that Entity A is
responsible for holding for its platform users, with separate
disclosure for each significant crypto-asset, and the vulnerabilities
Entity A has due to any concentration in such activities.\10\ In
addition, because the crypto-asset safeguarding liabilities and the
corresponding assets are measured at the fair value of the crypto-
assets held for its platform users, the entity would be required to
include disclosures regarding fair value measurements.\11\ The
accounting for the liabilities and corresponding assets should be
described in the footnotes to the financial statements.\12\ In
providing these disclosures, Entity A should consider disclosure about
who (e.g., the company, its agent, or another third party) 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.
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\10\ For U.S. GAAP, see FASB ASC 275-10-50. For IFRS, see IAS 1.
\11\ For U.S. GAAP, see FASB ASC 820. For IFRS, see IFRS 13.
\12\ For U.S. GAAP, see FASB ASC 235-10-50. For IFRS, see IAS 1.
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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
Commission rules, such as in the description of business, risk factors,
or management's discussion and analysis of financial condition and
results of operation.\13\ For example, to the extent it is material,
Entity A may need to provide disclosure describing the types of loss or
additional obligations that could occur, including customer or user
discontinuation or reduction of use of services, litigation,
reputational harm, and regulatory enforcement actions and additional
restrictions. A discussion of the analysis of the legal ownership of
the crypto-assets held for platform users, including whether they would
be available to satisfy general creditor claims in the event of a
bankruptcy should be considered. Further, Entity A may need to provide
disclosure of the potential impact that the destruction, loss, theft,
or compromise or unavailability of the cryptographic key information
would have to the ongoing business, financial condition, operating
results, and cash flows of the entity. As part of this disclosure,
Entity A should also consider including, to the extent material,
information about risk-mitigation steps the entity has put in place
(e.g., insurance coverage directly related to the crypto-assets held
for platform users).
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\13\ See, e.g., Item 101 of Regulation S-K; Item 105 of
Regulation S-K; Item 303 of Regulation S-K.
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Question 3: How and when should Company A initially apply the
guidance in this Topic in its financial statements?
Interpretive Response: The staff would expect 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, to apply the guidance in Topic 5.FF 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.
The 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 Topic
5.FF 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 this guidance.\14\ If
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the filing does not include a subsequent interim period that also
reflects application of this guidance, then the staff expects it to be
applied retrospectively to the beginning of the two most recent annual
periods ending before June 15, 2022.
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\14\ For example, a calendar year-end company that submits a
registration statement in January 2023 including financial
statements as of and for the fiscal year ending December 31, 2021
and as of and for the nine months ended September 30, 2022 would
apply the SAB to those periods.
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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.\15\
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\15\ For U.S. GAAP, see FASB ASC 250-10-50-1 through 50-3; for
IFRS, see IAS 8. See also, e.g., Item 302 of Regulation S-K and
PCAOB Auditing Standard 2820 (par. 8).
[FR Doc. 2022-07196 Filed 4-8-22; 8:45 am]
BILLING CODE P
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