Moody’s on FTX: better accounting, disclosures rules are needed

‘The FTX case draws attention to the concept of fair value for cryptoassets’

The cryptoassets sector is in need of improved accounting standards and strong disclosure rules, credit ratings agency Moody’s wrote in its latest Credit Outlook report, speaking on the collapse of cryptocurrency exchange FTX.

“On 18 November, FTX updated its bankruptcy filing. The initial 11 November filing and subsequent update have elevated concerns about cryptoassets, especially those whose value is largely supported by related-party valuations,” the report said.

“We believe the key to limiting investors’ risk of future FTX-like defaults is to require a consistent and appropriate basis of measurement and strong supplemental disclosures.

“This should help investors to understand the value, performance and risk profile of cryptoassets in companies’ audited financial statements.”

Moody’s said in the report that the US Financial Accounting Standards Board (FASB) has already progressed this year in improving accounting for cryptoassets “by adding a project to its technical agenda to explore accounting for and disclosure of certain cryptoassets, such as digital currencies”.

The report said companies should use “fair value” accounting methods when measuring bitcoin and assets in the crypto space.

“We welcome this project because US GAAP [generally accepted accounting principles] currently has no prescribed accounting that accurately reflects issuers’ use of cryptoassets and related risks,” the report said.

“Investors have been relying on voluntary disclosures to understand any delta between the book value (cost less impairment) and the fair market value of any digital currency holdings.

“The FASB has not yet given a view on the income statement treatment. We have considered the effect on reporting under both ‘fair value through P&L [profit and loss]’ and ‘fair value through other comprehensive income’ (OCI) approaches.

“Both approaches have pros and cons for investors.”

Moody’s said FTX’s collapse draws attention to the idea of fair value and FTX’s own coin called FTT, which lost the bulk of its value since the crypto firm entered bankruptcy proceedings.

“The FTX case draws attention to the concept of fair value for cryptoassets like FTT, which could lead investors to misplace confidence in a value supported by a related-party exchange that is highly illiquid and has few relative (third-party) transactions.

The report said the risks associated with assigning fair value can be mitigated through disclosures that address information about the source of fair value amounts and how factors add to the risk or volatility of the fair value information.

Chief Executive Officer of Castle Hall Diligence Chris Addy said last week during a webinar that focused on what went wrong with FTX, that he would have liked to see a company like FTX audited by one of the big four accounting firms or some of the firms just below them, in order for the company to have more credibility.

He also questioned how some large venture capital firms could have invested their money into a company that has now been found to have very lax cash management systems and no “appropriate disbursement controls”, as pointed out by new FTX Chief Executive Officer John J. Ray, who is overseeing the Chapter 11 bankruptcy proceedings of the company.

Ray explained in his court documents last week that many of the companies in the FTX group, especially those in Antigua and The Bahamas, did not have appropriate corporate governance.

“I understand that many entities, for example, never had board meetings,” he said.

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Chester Robards

Chester Robards rejoined The Nassau Guardian in November 2017 as a senior business reporter. He has covered myriad topics and events for The Nassau Guardian. Education: Florida International University, BS in Journalism

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