More U.S. companies are investing in nonfungible 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 art, baseball cards or digital music and can provide access to services like live streamed concerts. NFTs are stored and traded on decentralized computer networks, or blockchains. Artist Kevin McCoy in 2014 created a pixelated animation of an octagon which is widely considered 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 yet another digital asset–alongside bitcoin and Ethereum–for which U.S. reporting rules don’t specify how to account for or disclose. While securities regulators are scrutinizing the cryptocurrency market and the U.S. accounting standard-setter is researching certain digital assets, NFTs don’t appear to be a priority for either.
NFTs are more difficult to value than cryptocurrencies because they aren’t interchangeable, can’t be traded on exchanges and tend to be treated similarly to art or music, with their worth being somewhat subjective, said Vivian Fang, associate accounting professor at the University of Minnesota.
The price of NFTs isn’t based on trades on a particular exchange, but instead, 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.
Businesses such as lifestyle firm
PLBY Group Inc.,
online sports-betting company
and cryptocurrency exchange
Coinbase Global Inc.
in recent months have incorporated NFTs into their business by, for example, creating NFTs for customer loyalty programs or building platforms to trade them. Few of these businesses have disclosed details in their regulatory filings because they don’t deem the value of NFTs they bought or sold material to investors.
Payments services firm
last August said it paid for an NFT using nearly $150,000 in Ethereum to better understand the marketplace for these tokens. “We need a firsthand understanding of the infrastructure requirements for a global brand to purchase, store and leverage an NFT,” Cuy Sheffield, Visa’s head of crypto, said in a blog post at the time. The San Francisco-based company, which didn’t mention the transaction in its latest annual filing, declined to comment further.
Companies that purchase and hold NFTs account for them as indefinite-lived intangible assets–similar to bitcoin, trademarks and website domains–based on nonbinding guidelines from the Association of International Certified Professional Accountants, a professional organization.
Under those guidelines, businesses have to review the value of the assets at least once a year. Companies need to write down the value if it drops below the purchase price, depending on the result of their annual impairment test. If the value rises, companies can only record a gain when they sell the assets.
PLBY, the Los Angeles-based company behind the Playboy brand, last year bought about $250,000 in NFTs. Accounting for NFTs as intangibles doesn’t accurately reflect the volatility of these tokens, Chief Financial Officer
said. “The fact that you can’t mark it back up doesn’t really seem to make sense,” he said. Fair-value accounting, in which companies recognize losses and gains in value immediately and treat NFTs as financial assets, would be more accurate, he said.
The company last year partnered with artists to create NFTs. It sold about 12,000 NFTs for $12 million. PLBY said it took a $1 million impairment charge tied to its Ethereum and NFT holdings last year. The company reported $246.6 million in net revenue for 2021, up 67% from the prior year. Companies that sell NFTs count the proceeds of the sale as revenue under U.S. accounting standards
The Financial Accounting Standards Board doesn’t have plans to review accounting or disclosure for NFTs, a spokeswoman said. The U.S. accounting standard setter in December said it would conduct research on how to account for and disclose digital assets that don’t carry ownership rights, such as cryptocurrencies.
The FASB’s research on digital assets won’t cover NFTs, as these digital assets generally have copyrights, the spokeswoman said. Ownership of an NFT may be subject to copyright protection. “We are always open to more feedback on issues we may consider addressing in the future,” the spokeswoman said.
Accounting experts say the FASB should consider NFTs in its research and make potential new rules applicable to all types of assets. “Digital assets should be grouped together and put in one bucket,” said Shripad Joshi, a senior director at S&P Global Ratings, the ratings firm. “If the FASB decides on fair value accounting for crypto, then I don’t see why this would be something very different.”
The Securities and Exchange Commission under Chairman
is working to clarify the rules for the approximately $2 trillion cryptocurrency market, though its focus is more on crypto lending and trading platforms than NFTs.
NFTs last year were mentioned in 14 letters between the SEC and companies or funds, up from one letter in 2020, according to research firm Audit Analytics. In most cases, the SEC asked companies to clarify statements about their NFT-related business plans in filings for initial public offerings. Its corporate-finance division, which oversees company disclosure, often sends comment letters to public companies asking about their disclosures or accounting practices.
Investors are watching what companies say about their NFT activities. NFTs were mentioned on 119 calls that companies held with analysts so far this year through Friday, up from 194 for all of 2021 and four in 2020, according to Sentieo Inc., a financial data firm.
“If there’s no fences around these kinds of transactions, somebody’s bound to get creative or unknowingly account for them in a weird way that is different from everybody else,” said
owner of R.G. Associates Inc., an investment research firm and portfolio manager.
The lack of specific accounting rules around NFTs will likely lead some companies to adjust existing U.S. generally accepted accounting principles, or GAAP, and come up with non-GAAP metrics to reverse their impairment losses, said Ben Wechter, an 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 on the FASB to address the accounting before they invest,” Mr. Wechter said.
Write to Mark Maurer at [email protected]
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