This chapter addresses commonly encountered issues related to crypto asset fair value measurements. The PwC Fair value measurements
(FV) guide includes additional guidance on ASC 820 Fair Value Measurement
requirements and our interpretations which also may be relevant to crypto assets.
Excerpt from ASC 820-10-20
Fair value: The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
establishes a framework for determining fair value. Fair values are divided into a three-level fair value hierarchy in accordance with ASC 820-10-35-37
, as follows:
- Level 1: observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets
- Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly
- Level 3: unobservable inputs (e.g., a reporting entity’s or other entity’s own data)
Generally, ASC 820
gives precedence to observable inputs over unobservable inputs. ASC 820
prioritizes observable data from active markets, placing measurements using only those inputs in the highest level of the fair value hierarchy (Level 1). The lowest level in the hierarchy (Level 3) includes inputs that are unobservable, which may include an entity’s own assumptions about cash flows or other inputs. In some cases, the inputs used to measure fair value may be categorized within different levels of the fair value hierarchy. In those cases, the determination of level is based on the lowest level of significant inputs used in valuation models. For example, if a valuation is not based on Level 1 inputs at the reporting date because there is not an active market, the value will need to be determined using a valuation model. The objective in such valuations should be to estimate what the exit price of the entity's position at the valuation date would be. See FV 4.5
for additional information on the fair value hierarchy.
It should be noted that the hierarchy level of a crypto asset might evolve over time. For example, it is possible that a crypto asset that was previously valued using Level 3 inputs might become traded in an active market, or vice versa.
contains a number of disclosure requirements related to the level of the measurement hierarchy that a fair value measurement falls into, as well as the measurement basis used in the financial statements. See FSP 20.3.1
through FSP 220.127.116.11
for additional information on disclosure requirements related to the fair value hierarchy.
4.1.1 Active market determination
The first step in considering the fair value of a crypto asset is to determine if an active market exists for that crypto asset at the measurement date (i.e., whether it is a Level 1 valuation).
Excerpt from ASC 820-10-20
Active market: A market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
The accounting standards do not define specific thresholds that need to be exceeded with regard to frequency (such as active trading days) and volume (such as turnover ratio) to determine if an active market exists. As such, the determination is subject to judgment.
specifies that in all cases, if there is a quoted price in an active market (that is, a Level 1 input) for an asset or liability, a reporting entity shall use that quoted price without adjustment when measuring fair value. ASC 820-10-35-54C
through ASC 820-10-35-54H
address valuations in markets that were previously active but are inactive in the current reporting period, and FV 4.6
discusses fair value measurements when transactions occur in markets deemed to be inactive.
4.1.2 Principal market determination
In some cases, there might be several markets for a particular crypto asset that meet the definition of an active market, and each of those markets might have different prices at the measurement date. In these situations, ASC 820
requires a reporting entity to determine the principal market for the asset. The principal market is the market with the greatest volume and level of activity for the relevant crypto asset that the entity holding the crypto asset can access.
The principal market must be available to and accessible by the reporting entity. If there is a principal market, fair value should be determined using the price in that market.
To determine the principal market, the reporting entity needs to evaluate the level of activity in various markets. However, the entity does not have to undertake an exhaustive search of all possible markets in order to identify the principal or most advantageous market; it should take into account all information that is readily available. In the absence of evidence to the contrary, the market in which an entity normally transacts is presumed to be the principal market.
If there is no principal market, or the reporting entity does not have access to the principal market, fair value should be based on the price in the most advantageous market (i.e., the market in which the entity would maximize the amount received to sell an asset). The identification of the principal or most advantageous market is a single market, not an average across markets. See FV 4.2.2
for additional information on the determination of the principal or most advantageous market.
If a reporting entity holds a crypto asset that has restrictions on its sale, transferability, or use, the impact of the restriction on fair value depends on whether the restriction is a characteristic of that crypto asset or is a restriction specific to the holder. If the restriction is entity-specific and does not transfer in an assumed sale, the restriction would not be considered part of the unit of account, and therefore a market participant would not include the restriction in the fair value measurement of the crypto asset. However, if a restriction transfers with the crypto asset in an assumed sale, the restriction would generally be considered a characteristic of the crypto asset and therefore would be included by a market participant in determining the fair value measurement of the crypto asset. The assessment of whether a restriction is a characteristic of the asset, and as such a part of the unit of account, can be judgmental. See FV 4.8
for guidance on the fair value of restricted assets after adoption of ASU 2022-03
, which provides guidance on the fair value measurement of equity securities subject to contractual sale restrictions that may be helpful by analogy.
If there is a Level 1 input (i.e., quoted price in an active market), that price should be used as fair value. There should not be any adjustment to reflect the size of the holding (e.g., blockage factor) of crypto assets (see ASC 820-10-35-36B
). Rather, the fair value would be calculated as price multiplied by quantity. See FV 4.7.1
and FV 18.104.22.168
for additional information on Level 1 measurements and blockage factors, respectively.
4.1.3 Post-market close event
As discussed in ASC 820-10-35-41C(b)
, events may occur after the close of a market but before the end of the measurement date. When that is the case, a quoted market price may not be representative of fair value on the measurement date. Reporting entities should establish and consistently apply a policy for identifying and incorporating events that may affect fair value measurements. Crypto markets often do not have a traditional market close and may operate continuously; therefore, reporting entities should establish a process to obtain market prices through the end of the day as of the reporting date to assess fair value of the crypto assets. For crypto assets that are in the scope of ASC 350-60 and marked-to-market, the fair value estimate should generally be based on the last trading price prior to midnight of the appropriate time zone of the reporting entity; similarly for crypto assets not subject to ASC 350-60, the impairment assessment should consider transaction prices up to midnight. See FV 22.214.171.124
for additional information on the impact of post-market close events.