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Consolidating Financial Data of Newly Acquired Companies in the Group’s Financial Reporting Process

Today we will work through one consolidation accounting example where we will learn step-by-step how changes in every single input or assumption affect the consolidation journal entries and show how to present each layer of these changes in a consolidation worksheet.

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In our example, we will use positive amounts to display debit balances and negative amounts (using parentheses) to display credit balances. We will assume that there are two companies – Company P (Parent) and Company S (Subsidiary). Both entities have a reporting period ending on December 31, 20X2. Company P obtains control of Company S in a business combination. Company P follows US GAAP accounting principles. However, for illustrative purposes only, we show intermediate steps that, by themselves, may not be consistent with US GAAP; to comply with the standards, these steps must be combined with the immediately following steps. All amounts below are stated in thousands of US dollars unless stated otherwise.

Prior to the acquisition, the following items are included on the balance sheets of P:

• Property, Plant and Equipment (PP&E) of $30k,

• Cash and Cash Equivalents of $120k,

• Accounts Payable of $(25)k,

• Share Capital of $(25)k, and

• Retained Earnings of $(100)k

On the balance sheets of S:

• Property, Plant and Equipment (PP&E) of $30k,

• Cash and Cash Equivalents of $15k,

• Accounts Payable of $(5)k,

• Share Capital of $(15)k, and

• Retained Earnings of $25k.

Step 1. Consolidation at the acquisition date on the first day of the year

Step 1 of our example begins with the acquisition of a subsidiary on 1 January 20X2. Each subsequent step modifies one item from the previous step and shows its effect on the consolidation worksheet. Unless otherwise stated, the preceding assumptions continue to apply.

At the acquisition date, S has net assets of $40k calculated as total assets reduced by liabilities or, alternatively, as the sum of equity accounts. In Step 1, we assume the book value of net assets approximates their fair value and that the total consideration paid equals the fair value of its net assets.

In the consolidation worksheet, P’s investment is eliminated against S’s equity accounts as of the acquisition date. As a result, the subsidiary’s assets and liabilities are added to the Group’s assets and liabilities, presenting the assets and liabilities of the consolidated group rather than the assets and liabilities of any standalone entity.

Step 2. Consolidation at the acquisition date at the end of the first quarterly period

Now let’s assume that P acquired S three months later, on April 1.

During the first quarter, S generates revenue of $30k and incurs expenses of $26k. The resulting $4k profit fully converted to cash, increasing Cash and Cash Equivalents from $15k to $19k and Net Assets from $40k to $44k. Assume the consideration paid still equals the fair value of net assets, now $44k. All other assumptions remain the same.

To consolidate, we now need to perform a “Cut-off” procedure (also sometimes referred to as the reformation of income statement accounts). S’s trial balance sheet presents year-to-date (YTD) earnings as P&L account balances. Those accounts represent results of operations prior to the date of acquisition; however, the consolidated P&L should only include results of operations of S since the date of acquisition. Therefore, we excluded YTD earnings by including the Cut-off adjustment and transferred the $4k pre-acquisition profit to S’s acquisition-date retained earnings, which now have a balance of $(25)k+$(4)k=$(29)k.

We then add the “Acquisition” adjustment to eliminate P’s $44k investment against S’s net assets of $44k, consisting of share capital of $15k and acquisition-date retained earnings of $29k.

Step 3. Consolidation at the fiscal year-end

Next, we will prepare the consolidation worksheet for the same group and acquisition date, but 9 months (3 quarters) later, at fiscal year-end. Between April 1 and December 31, S generated revenues of $(110)k and incurred expenses of $99k, producing a net result of $(11)k periodic income.

December 31 historical trial balance of S exported from the local ERP includes a twelve-month revenue figure of $(140)k, consisting of $(30)k earned during the first quarter and $(110)k earned in subsequent (second through fourth) quarters of the year. It also shows twelve-month expenses of $26k (first quarter) + $99k (second through fourth quarters) = $125k. We assume income earned fully converts into cash, increasing Cash and Cash Equivalents up to $30k. S’s annual income accounts have not yet been closed and show the full annual amount of earned revenues and incurred expenses prior to and after the acquisition date. For simplicity, we will continue to assume that P has no income or expenses during this year.

S’s annual earnings of $(15)k are therefore divided between the $(4)k earned before the acquisition date and the $11k earned afterward. Only the latter contributes to consolidated profit.

First, we repeat our Cutoff adjustment to remove pre-acquisition income earned during the first quarter. Consequently, the group’s revenue for the year equals S’s revenue earned after the acquisition date of $110k. The same applies to incurred expenses of $99k. This results in the group’s consolidated income being $11k at the end of the fiscal year.

After year-end, we will close consolidated income to the Retained Earnings account attributable to the respective company, increasing the account balance from $(100)k to $(111)k.

Share

Step 4. Consolidation when the purchase price exceeds the fair value of net assets

Now let’s assume that P paid $90k to acquire S on April 1. The higher purchase price requires an additional $46k cash payment, reducing P’s remaining cash from $76k to $30k.

At the acquisition date, the fair value of S’s identifiable net assets remains $44k. Because the consideration paid exceeds that amount, the difference of $90k − $44k = $46k is recognized as goodwill.

In the consolidation worksheet, the “Acquisition” adjustment eliminates P’s $90k investment against S’s acquisition-date equity of $44k and recognizes goodwill of $46k. The cutoff adjustment continues to transfer the $4k first-quarter profit to acquisition-date retained earnings, as in the preceding step.

The higher payment reduced consolidated Cash and Cash Equivalents by $46k, which formed the goodwill account balance, also $46k.

Step 5. Consolidation when the fair value of land exceeds its book value

Next, let’s assume at the acquisition, the fair value of land held by S was determined to exceed its book value by $25k. The consideration paid remains $90k.

The land adjustment increases the fair value of identifiable net assets from $44k to $69k. Consequently, a larger portion of the purchase price is attributable to identifiable assets, reducing goodwill to $90k − $69k = $21k.

In the consolidation worksheet, the Acquisition adjustment now includes a $25k increase in Property, Plant and Equipment (PPE). Compared with Step 4, goodwill decreases by the same amount, from $46k to $21k.

Total consolidated assets remain unchanged because the adjustment reallocates $25k from goodwill to land. No adjustment to subsequent earnings is needed because land is not subject to depreciation.

Step 6. Consolidation when P acquires an 80 percent controlling interest

Now let’s assume that P acquires 80% of S for $90k, with the remaining 20% held by outside shareholders. We have retained the consideration from Step 5 while changing the ownership percentage acquired. The outside shareholders’ interest is presented in consolidated equity as a noncontrolling interest (NCI).

For this intermediate step, we will record NCI in a manner similar to the IFRS 3 option to measure qualifying present ownership interests at their proportionate share of identifiable net assets. Step 7 then illustrates fair-value measurement, which is required under US GAAP for the assumed business combination.

The fair value of S’s acquisition-date identifiable net assets remains $69k, including the $25k land uplift. Acquisition-date NCI is therefore 20% × $69k = $13.8k. Goodwill equals the consideration paid plus NCI, less identifiable net assets:

$90k + $13.8k − $69k = $34.8k.

Because P controls S, the consolidated financial statements include all of S’s assets, liabilities, revenue, and expenses. The ownership percentages determine how the post-acquisition profit is attributed between P and the outside shareholders.

Of the $11k earned after acquisition, 80%, or $8.8k, is attributable to P, and 20%, or $2.2k, is attributable to NCI. Adding the latter amount to acquisition-date NCI gives a closing balance of $13.8k + $2.2k = $16k.

The worksheet reflects the $2.2k profit allocation by debiting retained earnings and crediting NCI. At this stage, the income accounts remain open, so retained earnings attributable to P appear as a credit balance of $(97.8)k, calculated as $(100)k + $2.2k.

Closing the full $11k consolidated income then increases that credit balance to $(108.8)k. This equals P’s opening retained earnings of $100k plus its $8.8k share of S’s post-acquisition income.

Step 7. NCI recognized at fair value

For the next step, P still acquires an 80% controlling interest for $90k, but acquisition-date NCI is now measured at its fair value of $20k.

With identifiable net assets remaining at $69k, goodwill calculates as:

$90k consideration + $20k NCI − $69k identifiable net assets = $41k.

Compared with Step 6, acquisition-date NCI increases by $6.2k, from $13.8k to $20k. Goodwill increases by the same amount, from $34.8k to $41k.

The ownership percentages and post-acquisition operating results remain unchanged. NCI is still allocated $2.2k of the $11k profit, bringing its closing balance to $20k + $2.2k = $22.2k. Retained earnings attributable to P close at $108.8k, including its $8.8k share of the profit.

Step 8. Intercompany balances

Next, assume that after the acquisition, S paid $5k in accounts payable for a consulting engagement ordered by P, and P financed this payment by extending a $5k advance to S. S uses the proceeds to repay its existing $5k accounts payable.

On P’s books, the transfer reduces cash from $30k to $25k and creates a $5k intercompany receivable from S. On S’s books, these activities leave cash at $30k and an intercompany payable of $5k to P.

The receivable and payable represent amounts owed between entities within the same group. Therefore, we eliminate them with a $5k debit to the intercompany payable and a $5k credit to the intercompany receivable.

This elimination reduces the combined entities’ assets and liabilities by $5k each. Separately, the repayment to the external lender has reduced the group’s cash and accounts payable by $5k.

Step 9. S elects pushdown accounting

Up to this point, consolidation adjustments have been used to recognize the acquisition-date land uplift and goodwill. Now let’s assume that S elects pushdown accounting on April 1, adopting the acquisition basis in its separate financial statements. We continue with the $41k goodwill balance and the $25k land uplift from Step 7.

The worksheet first shows the reconciliation of S’s historical trial balance as of the acquisition date. As in the earlier cutoff adjustment, the $4k first-quarter income is removed from P&L accounts and included in retained earnings at acquisition. This increases the Retained Earnings account from $(25)k to $(29)k. It should be noted that the cut-off adjustment would not be recorded in the separate books of S.

The pushdown adjustments then reset the $29k acquisition-date retained earnings balance and recognize the $25k land uplift and $41k goodwill. Our policy is to balance adjustments to net assets with the additional paid-in capital (APIC) account, which captures the total $(95)k offset to the increase in net assets value, while maintaining the existing share capital balance of $(15)k. Together, share capital and APIC represent acquisition-date equity of $110k, equal to P’s $90k consideration plus the $20k acquisition-date fair value of NCI.

After the subsequent operations described above, S’s adjusted trial balance contains revenue of $(110)k and expenses of $99k related to April through December.

The consolidation worksheet now starts with these pushdown-adjusted balances. The “Acquisition” adjustment eliminates S’s $15k share capital and $95k APIC against P’s $90k investment and recognizes acquisition-date NCI of $20k. Goodwill and the land uplift enter the consolidated figures through S’s recorded balances.

The intercompany elimination and allocation of post-acquisition profit remains the same as in the previous step: consolidated income of $11k, comprising $8.8k attributable to P and $2.2k attributable to NCI.

The worksheet shows retained earnings attributable to P of $(97.8)k, which already reflects the $2.2k adjustment for the portion allocated to Non-Controlling Interest. Closing consolidated P&L accounts will bring retained earnings to $(108.8)k, while closing NCI is $22.2k.

Conclusion

Today we reviewed a simple illustration of consolidation accounting setup for a newly acquired subsidiary. This was a theoretical exercise intended to demonstrate how accounting teams can use trial balance sheet reports and consolidation analysis to incrementally transform combined account balances into consolidated account balances. In our future issues, we are going to delve into some practical organizational aspects associated with acquisitions of new subsidiaries, and pay particular attention to aspects specific to the Web3 industry.

Rare Gems

The Book of Jargon. US Corporate & Bank Finance. Glossary of US Corporate and Bank Finance Slang and Terminology by Latham & Watkins [here]

Combining Portfolio Companies: Demystifying the Accounting Implications by BDO [here]

Post-Acquisition Integration Handbook by Baker McKenzie [here]

Strategic Accounting with Andrei

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Pricing a small issuer’s 10-Q preparation budget

Even startups with little or no revenue can give accountants plenty to untangle. We developed an estimated preparation budget based on several assumptions stated below:

• This is a first-time engagement; no prior-period working papers are available to gain efficiency;

• We assume the client’s books are in moderate condition, and no major classes of transactions or accounts require significant rework time.

• Changes in accounting standards that took effect during the period and were expected to materially impact the financial statements were already implemented.

• Significant unusual transactions during the quarter were already documented in technical accounting memoranda.

• No more than two rounds of comments from management, auditors, and advisers are assumed.

Initial implementation of a significant accounting standard, historical cleanup, and building a reporting process from scratch are all examples of circumstances that would materially impact our estimate.

Here is how the preparation hours are allocated:

Of the senior’s 68 hours, 32 hours cover recurring entries and supporting schedules, 16 hrs cover preparing financial statements, and 20 hours are budgeted for tie-outs and comments; managers and directors focus on accounting conclusions and review. If prior-period working papers were available, we could allocate much of this work to junior team members, with appropriate supervision.

Next, we searched for empirical evidence to support the reasonableness of this estimate. Using EDGAR, we found a few examples that provided essential support for this article. We will cover two data points below.

First, Brio Financial Group’s engagement letter with Innovation1 Biotech (from January 2025). We used hourly rates from this engagement letter in our model estimate above. The agreement also provides an $8,500 monthly retainer ($25,500 over three months) for greater accounting and reporting support. Brio charges separately for analysis of additional debt and equity raises, and significant changes in business or transaction volume could trigger renegotiation. Innovation1 Biotech is a shell with no revenue sources that is seeking a business combination; as such, it naturally requires significantly less work than an active business. As a result, our preparation estimate is about 41% higher than Brio’s three-month retainer. Additionally, a recurring package lets us charge lower hourly rates for every budgeted hour, resulting in a naturally lower fee.

Second, SurgePay's agreement with MACK Financial Solutions (from January 2026) provides for $10,000 a month in combined CFO and accounting services, equivalent to $30,000 over three months. Our $36,070 preparation estimate is approximately 20% higher. However, this is a recurring service package. If the customer terminates the agreement, the vendor can still generate revenue during the required 60-day notice period. As a result, the vendor can expect predictable monthly revenue, allowing it to offer a greater discount. SurgePays engaged the firm after its previous CFO departed. According to the Proxy Statement, the departed executive’s salary was $488,656, while MACK Financial Solutions’ annualized fees are just $120,000. The transition strongly suggests an effort to obtain financial leadership at a substantially lower fixed cost, where the discount offered by the firm played a significant role in the client’s vendor selection process.

Besides the preparation fee, the company’s reporting budget should also include costs of the auditor’s interim review, valuation support (if applicable), legal counsel, and filing services. We again reviewed EDGAR filings and noted that, for example, Nasdaq-listed 374Water reported $165,000 in audit fees and $46,000 in audit-related fees in 2025, covering its annual audit, quarterly reviews, comfort letters, etc.

Including these outside services, the illustrative quarterly cash budget is:

When developing the proposal, the following considerations should be addressed:

• Separate recurring work from significant transactions. Define and include routine quarterly services in the scope. Propose additional work related to new financing rounds, major accounting changes, and cleanup services as separate engagements.

• Clearly define each party’s responsibilities upfront. Specify deliverables the client must provide, together with deadlines that allow you to have a reasonable amount of time to complete the filing draft. If you later discover the client needs help with historical cleanup and reconstruction of accounting records, separate those services from recurring reporting work.

• Specify task dependencies and deadlines for client schedules and supporting documents. Agree on how late inputs or changed facts affect timing and fees.

• Authorize scope changes when they arise. AICPA guidance emphasizes the need for separate engagement letters and modifications of existing agreement when the scope of work expands.

• Separate the calculated fee from the commercial offer. The budget should identify all of the following:

  • standard hourly fees,

  • potential efficiencies (along with the related conditions necessary to achieve those efficiencies),

  • negotiated discount.

• Assess the effect of late changes. Late changes often require reevaluating completed work, updating corresponding disclosures, and re-performing financial tie-outs. Distinguish corrections to the firm’s own work from additional work caused by new client information to determine whether additional fees are warranted under the engagement terms.

• Confirm specialist scope and fees. Explicitly identify external expert hours and fees as provisional.

• Reconcile estimated hours with actual work after filing. Separate additional scope from avoidable rework and inefficient staffing. Use that record to price the next quarter.

In our experience, the best practices above can dramatically improve the client’s experience and fee discussions at each renewal date.

Rare Gems

US IPO Guide by Latham & Watkins LLP [here]

The Project “Deferred tax - tax base of assets and liabilities” Initial Meeting Paper by IFRS Interpretations Committee [here] addresses a question about the recognition of deferred taxes when a lessee recognizes an asset and liability at commencement of a lease.

ABA, Audit Responses Framework [here]

AICPA’s October 22, 2026 “Small Firm Success Series” Webinar [here]

SEC historical Form 10-Q burden estimate [here]

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Capitalizing Token Costs

Imagine. Your company has unleashed the power of agentic AI in the hands of every employee. Everyone’s productivity is growing 10x- 100x; your sales team delivers growth that you could never imagine, and the costs of AI platforms used to achieve these results are incomparably small compared to the benefits. If this is what’s happened to your business, this article is not for you. Most companies that have implemented agentic AI capabilities have not fully captured additional value; however, they have undoubtedly incurred the full incremental costs. How should we account for these incremental AI costs?

There is no separate accounting model for AI token costs. The treatment should be based on the nature of the activity consuming tokens. Token costs may therefore be capitalized when they are directly attributable to qualifying software development activities during the applicable capitalization period, but the same token costs are expensed when they relate to experimentation, maintenance, ordinary business operations, or other noncapitalizable activities

Learn about Andrew's work

At the end of this article, you will see a list of useful resources on the topic that cover a lot of questions surrounding accounting for token costs. Below, we will focus on one topic: whether it is appropriate to capitalize token costs and, if so, what conditions must be met for capitalization.

Why capitalize AI token costs?

Tokenmaxing behaves like a maximax strategy in a zero-sum game. According to game theory, maximax is not the best strategy to play in a zero-sum game (assuming the effects of information asymmetry are negligible). It can lead to unpredictable losses and uncertain gains. An organization's goal should be to maximize the positive difference between expected gains and losses while also avoiding scenarios where this difference is negative.

As an economist, I have certain notions deeply ingrained in my head: the perception that costs incurred for my business should ultimately increase its profits. This increase in profits can arise either from income created (e.g., incremental contribution margin from sales resulting from additional advertising spending) or because incurred costs are lower than alternative costs (i.e., compliance costs that allow one to avoid fines and penalties for non-compliance).

However, we also have to consider the fact that both alternative costs and incremental income are non-deterministic features of our reality. This is why the success or failure of any single decision is almost never defined by performance. To evaluate performance in a way that maximizes yield on capital, we need to allocate capital based on the respective probabilities of alternative costs and incremental income.

Cost capitalization extends this principle by assessing whether additional contribution (i.e., benefits or cost savings) from particular costs is predictable enough for incorporation into financial forecasts, plans, and scenarios. The contribution is predictable when it is directly attributable to the asset's utility, the asset can be acquired at known costs, both contribution and utility can be measured in finite numbers, and such measured values make the project or enterprise commercially viable.

Vibe-coded solutions created by non-developer members without formal due process cannot produce a predictable economic contribution to the business, as these solutions are more akin to experimental prototypes. However, an internal or external software development team engaged by management may accept this prototype as an input and build a production-grade version. Further, when developing a production-grade version of an application, the software development team may incur AI token costs that are more likely to be perceived as a predictable contribution to the business than the AI token costs consumed during vibe-coding app development.

When considering whether AI token costs are eligible for capitalization, we need to review the underlying economics of AI token costs. Capitalization of AI token costs under the following two strategies might be reasonably viewed as potentially eligible for capitalization:

• Cost reduction strategy:

  • The new capability should either:

    • expand a single employee’s capacity, allowing them to perform the work of multiple peers, or staff employees, or contractors currently engaged to perform this work; or

    • remove the need for a human employee whatsoever.

  • The additional costs of implementation and ongoing operation of the new solution are determined to be lower than the cumulative costs of operating the existing solution over the horizon of 2-5 years;

• Profitable growth strategy:

  • The new capability should increase sales by an amount such that the corresponding contribution margin exceeds the additional costs of implementing and operating the new solution.

When management’s strategy does not allow articulation of specific results and the anticipated AI token costs needed to achieve those results, capitalization is generally not appropriate under accounting standards, underlying economics, or common sense.

When (if ever) is it appropriate to capitalize AI token costs?

Generally, AI token costs consumed by your finance or marketing team to create process automations for internal use would NOT be capitalizable. Even if they create functional prototypes of internal-use software that saves teams a significant amount of time.

However, when costs of certain software development projects are capitalizable, direct AI token costs consumed on such projects would also be capitalizable. The ability to capitalize costs depends on whether the entity tracks AI token costs by activity level or has a reasonable proxy for that tracking (e.g., when an employee is fully engaged in a single development project eligible for cost capitalization during the reporting period). Implementing FinOps best practices, including resource tags, will enable entities to achieve that required level of transparency.

When evaluating whether costs of software development are capitalizable, we first need to determine which accounting guidance applies:

• Subtopic 350-40: Software that is solely for the entity’s internal use (e.g., payroll processing, ERP, inventory stock management, agentic process automation) and software sold to customers exclusively on a hosted basis.

• Subtopic 985-20: Costs to develop software for sale or licensing to customers, including as part of a product or providing a service.

• Subtopic 730-10: Costs to create code solely for a particular project that are experimental in nature (i.e., considered R&D) and have no alternative future use are expensed as incurred.

• Subtopic 340-40: Fulfillment costs guidance applies to software that an entity develops for others under a contractual arrangement.

• Subtopic 350-30: Other costs of internally generated agents/automations generally require expensing as incurred unless they arise from identifiable, contractual-legal rights.

Once an entity identifies the applicable guidance, it applies it to AI software development without specific exceptions or different requirements than for other types of software development.

US GAAP does not specify income statement classification of development costs; therefore, it depends on the facts and circumstances [350-40-25-12, 25-14]. Generally, costs of software developed for use in the entity’s internal functions (accounting, sales, BD) are classified based on their intended functional use. Costs of software developed for hosted access by customers are classified as R&D.

ASU 2025-06

Under ASU 2025-06, all references to project stages in ASC 350-40 have been removed. However, the ASU did not change the guidance in ASC 985-20.

Under the new guidance, software costs should be capitalized once both thresholds have been met:

• Authorization threshold: Project is authorized, and funds are committed.

• Probable-to-complete threshold: Project completion is probable, and it is expected that the software will be used to perform the function intended (i.e., no significant development uncertainty exists).

Eligible development costs incurred after the above criteria are met and until all substantial testing is completed are capitalized. Costs incurred after all substantial testing is completed are expensed as incurred (unless they are capitalizable upgrade or enhancement costs). [350-40-25-6]

The following characteristics might be useful in the assessment of whether the project is eligible for capitalization:

• The project has documentation such as an approved implementation plan

• The software has novel functions or features with the uncertainty not being resolved through coding and testing.

• The significant performance requirements of the software have not been identified or continue to be substantially revised.

• A working prototype of the software has been created.

• Technological feasibility has been established.

Upgrades and enhancements

Upgrades and enhancements are defined as changes to existing software that result in additional software functionality (i.e., the ability to perform additional tasks), extend the life of externally marketed software, or significantly improve an existing software product’s marketability. Other updates (i.e., those that do not meet the definition of a product enhancement) and activities to correct errors or keep the software updated with current information are considered maintenance.

Identifying upgrades and enhancements often requires judgment to determine whether tokens spent create new functionality or maintain existing functionality without adding new capabilities or tasks the software can perform (i.e., merely allow the software to continue executing its current tasks).

Token costs used to upgrade or enhance software follow the same capitalization requirements as costs of new software development. Token costs used solely to maintain software are expensed as incurred.

Strategic Accounting with Andrei

Want to learn about integrating business strategy into your accounting process? Curious about the latest guidance? Or maybe you just want to get quick wins?

Our newsletter offers real insights from practitioners. If you have a topic you’d like to discuss, book some time with me!

Read on Substack

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Rare Gems

1. Determining Useful Lives of AI Assets and Accounting Considerations in AI Projects by CBIZ provides a great summary of accounting for development costs at companies that develop or fine-tune AI models.

2. Unlocking agentic value: a new investment discipline for the agentic era by EY. This article offers great insights into how the AI service cost structure has changed over time and what initial steps AI consumers can take to regain control.

3. Rethinking AI TCO: Why Cost per Token Is the Only Metric That Matters by Shruti Koparkar. An in-depth analysis of AI cost management by one of the few companies that benefits most from additional AI spending (Nvidia).

4. Giving AI Billing a Common Shape by FinOps Open Cost and Usage Specification (FOCUS). Structured approach for analyzing AI-related bills, primarily for technology businesses.

5. Managing AI Value Using FinOps Practice Operations by FinOps Foundation.

6. AI tokenomics: A CFO’s guide to governing the AI P&L by Deloitte. Advocating the view that AI

7. Hot Topic: Software data costs - Accounting considerations by KPMG.

8. Insights by Tokenomics Foundation.

7. Claude Tokens Compute Cost Code by Wired. A nice read about how companies achieve results that they think are worth all that extra AI token spend.

8. Where AI Costs Belong on the P&L by OnlyCFO’s. Great post on allocating AI expenses by P&L line items.

9. How are AI agents spending your tokens by Matty Smith, DigDig, May 5, 2026. The quote worth quoting: “Even when running the same agent on the same task, costs varied by up to 30x.”

10. How Do AI Agents Spend Your Money? Analyzing and Predicting Token Consumption in Agentic Coding Tasks by Longju Bai, Zhemin Huang, Xingyao Wang, Jiao Sun, Rada Mihalcea, Erik Brynjolfsson, Sandy Pentland, Jiaxin Pei

11. AI Token Cost and Accuracy Benchmark. Evaluating Strategy Mosaic Against Direct Text-to-SQL Execution. Benchmark Evidence on Query Accuracy, Coverage, and AI Token Cost Reduction by Strategy.

This resource provides illustrative disclosures and an adoption-screening inventory based on FASB Accounting Standards Updates reviewed through September 15, 2026. It distinguishes future-effective standards from conditional amendments and recently effective guidance relevant to 2026 reporting.

Adapt each example to the entity’s reporting circumstances. Preparers should confirm the update’s applicability and the relevant adoption date. Replace illustrative impact statements with language that reflects management’s supported assessment. Add relevant transition information where appropriate.

Inclusion of an update does not establish that it applies to a particular entity or that disclosure is required. Use the examples together with the applicable accounting and regulatory guidance.

Drafting convention

• Paired options follow the order {public business entities}/{entities other than public business entities}.

• Effective dates use the same order: {public effective date}/{nonpublic effective date}.

• Both date options are shown even when the dates are identical.

• Select the applicable options and remove the braces, slash, and unused alternatives.

• Where the nonpublic option is {not applicable}, omit that disclosure for a nonpublic entity.

Preparer note

Retain only disclosures relevant to the reporting entity and its adoption status. The closing impact statements are illustrative and should reflect management’s actual assessment. Use “consolidated financial statements” where appropriate. Remove drafting instructions and unused alternatives before publication.

Impact assessment writing framework

Impact not yet assessed or not estimable: “The Company expects to adopt the amendments on [date]. It is evaluating [specific affected accounting area] and has not yet determined the expected financial statement effect or selected a transition method.”

Impact is reasonably estimable: “The Company expects to adopt the amendments on [date] using [method]. Adoption is expected to [describe and quantify the effect], primarily because [entity-specific reason].”

Affects disclosures alone: “The Company expects to adopt the amendments for [reporting period] using [method]. Adoption will expand disclosures concerning [specific subject] and is not expected to change recognized amounts.”

No material effect assessed: “The Company expects to adopt the amendments on [date] using [method]. Based on its assessment of [relevant transactions or balances], adoption is not expected to have a material effect on its [consolidated] financial statements.”

Illustrative Disclosures

ASU 2024-03 and ASU 2025-01, Income Statement Expense Disaggregation

Applicable to public business entities only.

In November 2024, the FASB issued ASU 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses. In January 2025, the FASB issued ASU 2025-01 to clarify the effective date of ASU 2024-03.

The amendments require tabular disaggregation of specified expense categories included within relevant income statement captions. They also require disclosure of total selling expenses and, annually, the Company’s definition of selling expenses. The amendments expand financial statement disclosures without changing expense recognition or measurement.

The amendments are effective for annual reporting periods beginning after {December 15, 2026}/{not applicable}, and interim reporting periods within annual reporting periods beginning after {December 15, 2027}/{not applicable}. Early adoption is permitted.

The Company is currently evaluating the impact of adopting the amendments on its financial statement disclosures.

ASU 2025-03, Accounting Acquirer in the Acquisition of a Variable Interest Entity

In May 2025, the FASB issued ASU 2025-03, Business Combinations (Topic 805) and Consolidation (Topic 810): Determining the Accounting Acquirer in the Acquisition of a Variable Interest Entity.

The amendments change the identification of the accounting acquirer in business combinations effected primarily through an exchange of equity interests when the legal acquiree is a variable interest entity that meets the definition of a business. For these transactions, the accounting acquirer is determined using the applicable Topic 805 factors rather than automatically identifying the VIE’s primary beneficiary as the accounting acquirer.

For {public business entities}/{entities other than public business entities}, the amendments are effective for annual reporting periods beginning after {December 15, 2026}/{December 15, 2026}, including interim periods within those annual reporting periods. Early adoption is permitted.

The Company is currently evaluating the impact of adopting the amendments on its financial statements.

ASU 2025-04, Share-Based Consideration Payable to a Customer

In May 2025, the FASB issued ASU 2025-04, Compensation - Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606): Clarifications to Share-Based Consideration Payable to a Customer.

The amendments clarify that specified customer purchase targets are performance conditions when accounting for share-based consideration payable to a customer. They require estimated forfeitures for awards containing service conditions. They also clarify that Topic 606’s variable-consideration constraint does not apply to share-based consideration payable to a customer that is measured under Topic 718.

For {public business entities}/{entities other than public business entities}, the amendments are effective for annual reporting periods beginning after {December 15, 2026}/{December 15, 2026}, including interim periods within those annual reporting periods. Early adoption is permitted.

The Company is currently evaluating the impact of adopting the amendments on its financial statements.

ASU 2025-06, Internal-Use Software

In September 2025, the FASB issued ASU 2025-06, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software.

The amendments remove references to sequential software-development stages from the capitalization guidance. Capitalization begins when management has authorized and committed funding and completion and intended use are probable, subject to an assessment of significant development uncertainty. The amendments also align disclosures for capitalized internal-use software costs with the applicable Topic 360 requirements.

For {public business entities}/{entities other than public business entities}, the amendments are effective for annual reporting periods beginning after {December 15, 2027}/{December 15, 2027}, including interim periods within those annual reporting periods. Early adoption is permitted.

The Company is currently evaluating the impact of adopting the amendments on its financial statements.

ASU 2025-07, Derivatives Scope and Share-Based Noncash Consideration

In September 2025, the FASB issued ASU 2025-07, Derivatives and Hedging (Topic 815) and Revenue from Contracts with Customers (Topic 606): Derivatives Scope Refinements and Scope Clarification for Share-Based Noncash Consideration from a Customer in a Revenue Contract.

The amendments introduce a derivative scope exception for certain nonexchange-traded contracts whose underlyings are based on a party’s operations or activities, subject to specified exclusions. They also clarify that Topic 606 applies to share-based noncash consideration received from a customer until the entity’s right to receive or retain that consideration becomes unconditional.

For {public business entities}/{entities other than public business entities}, the amendments are effective for annual reporting periods beginning after {December 15, 2026}/{December 15, 2026}, including interim periods within those annual reporting periods. Early adoption is permitted.

The Company is currently evaluating the impact of adopting the amendments on its financial statements.

ASU 2025-08, Purchased Loans

In November 2025, the FASB issued ASU 2025-08, Financial Instruments - Credit Losses (Topic 326): Purchased Loans.

The amendments extend the gross-up approach for the initial credit-loss allowance to qualifying purchased seasoned loans. Eligible loans acquired in a business combination are treated as seasoned. Other purchased loans must satisfy the seasoning criteria, including acquisition at least 90 days after origination without the acquirer’s involvement in origination. The expanded approach excludes credit cards, debt securities, and Topic 606 trade receivables.

For {public business entities}/{entities other than public business entities}, the amendments are effective for annual reporting periods beginning after {December 15, 2026}/{December 15, 2026}, including interim periods within those annual reporting periods. Early adoption is permitted.

The Company is currently evaluating the impact of adopting the amendments on its financial statements.

ASU 2025-09, Hedge Accounting Improvements

In November 2025, the FASB issued ASU 2025-09, Derivatives and Hedging (Topic 815): Hedge Accounting Improvements.

The amendments revise the criteria for grouping forecasted transactions in cash flow hedges by permitting an assessment based on similar risk exposures. They also make targeted changes to eligible hedged risks and hedging instruments. Specified transition elections permit changes to certain existing hedging relationships without dedesignation.

For {public business entities}/{entities other than public business entities}, the amendments are effective for annual reporting periods beginning after {December 15, 2026}/{December 15, 2027}, including interim periods within those annual reporting periods. Early adoption is permitted.

The Company is currently evaluating the impact of adopting the amendments on its financial statements.

ASU 2025-10, Government Grants

In December 2025, the FASB issued ASU 2025-10, Government Grants (Topic 832): Accounting for Government Grants Received by Business Entities.

The amendments establish accounting requirements for government grants received by business entities. Grant recognition requires that receipt of the grant and compliance with its conditions are probable. The guidance distinguishes grants related to assets from grants related to income and specifies their subsequent accounting and presentation.

For {public business entities}/{business entities other than public business entities}, the amendments are effective for annual reporting periods beginning after {December 15, 2028}/{December 15, 2029}, including interim periods within those annual reporting periods. Early adoption is permitted.

The Company is currently evaluating the impact of adopting the amendments on its financial statements.

ASU 2025-11, Interim Reporting

In December 2025, the FASB issued ASU 2025-11, Interim Reporting (Topic 270): Narrow-Scope Improvements.

The amendments clarify Topic 270's applicability and organize existing interim disclosure requirements. They also establish a disclosure principle for material events and changes since the latest annual reporting period. The amendments apply when an entity presents interim financial statements and notes under US GAAP. They do not require an entity to begin issuing interim financial statements.

For {public business entities}/{entities other than public business entities}, the amendments are effective for interim reporting periods within annual reporting periods beginning after {December 15, 2027}/{December 15, 2028}. Early adoption is permitted.

The Company is currently evaluating the impact of adopting the amendments on its interim financial statement disclosures.

ASU 2025-12, Codification Improvements

In December 2025, the FASB issued ASU 2025-12, Codification Improvements.

The amendments make technical corrections, clarifications, and other improvements to various provisions of the FASB Accounting Standards Codification.

For {public business entities}/{entities other than public business entities}, the amendments are effective for annual reporting periods beginning after {December 15, 2026}/{December 15, 2026}, including interim periods within those annual reporting periods. Early adoption is permitted.

The Company is evaluating the amendments applicable to its operations and the impact of adopting them on its financial statements.

ASU 2026-01, Paid-in-Kind Dividends on Preferred Stock

In April 2026, the FASB issued ASU 2026-01, Equity (Topic 505): Initial Measurement of Paid-in-Kind Dividends on Equity-Classified Preferred Stock.

The amendments require paid-in-kind dividends on equity-classified preferred stock to be initially measured using the dividend rate specified in the preferred stock agreement and the contractual amount to which that rate applies. The amendments address initial measurement and do not change when the dividend is recognized.

For {public business entities}/{entities other than public business entities}, the amendments are effective for annual reporting periods beginning after {December 15, 2026}/{December 15, 2026}, including interim periods within those annual reporting periods. Early adoption is permitted.

The Company is currently evaluating the impact of adopting the amendments on its financial statements.

ASU 2026-02, Environmental Credit Obligations

In May 2026, the FASB issued ASU 2026-02, Environmental Credits and Environmental Credit Obligations (Topic 818).

The amendments establish accounting for environmental credits based on their intended use and for obligations arising under environmental compliance programs. They specify when credits qualify for asset recognition and how to measure related compliance liabilities. Costs of credits that do not meet the asset-recognition criteria are expensed.

For {public business entities}/{entities other than public business entities}, the amendments are effective for annual reporting periods beginning after {December 15, 2027}/{December 15, 2028}, including interim periods within those annual reporting periods. Early adoption is permitted.

The Company is currently evaluating the impact of adopting the amendments on its financial statements.

ASU 2026-03, Investment Companies: Equity Securities Subject to Contractual Sale Restrictions

In September 2026, the FASB issued ASU 2026-03, Fair Value Measurement (Topic 820): Investment Companies with Equity Securities Subject to Contractual Sale Restrictions.

The amendments require investment companies within Topic 946 to consider contractual sale restrictions when measuring the fair value of affected equity securities and to disclose the related discount.

For {public business entities}/{entities other than public business entities}, the amendments are effective for annual reporting periods beginning after {December 15, 2027}/{December 15, 2027}, including interim periods within those annual reporting periods. Early adoption is permitted on or after September 9, 2026. The amendments are applied prospectively to all equity securities, with adoption adjustments recognized in current-period earnings.

CONTENT

Question 1. Where should I start when preparing financial statements for an organization for the first time?

Question 2. What are useful applications of AI in financial reporting?

Question 3. How can I apply alternating row shading automatically in Excel?

Question 4. How do I determine whether all required disclosures have been included?

Question 5. How can I make financial statements in Word update from Excel?

Question 6. How should financial statement rounding differences be handled?

Question 7. Why do free-form drafting prompts produce weak footnotes?

Question 1. Where should I start when preparing financial statements for an organization for the first time?

Begin by defining the reporting requirements and structuring the process accordingly using the following resources:

• FASB ASC Codification

• Disclosure checklists

• Illustrative financial statements

• Peer filings

Illustrative financial statements published by accounting firms provide a useful starting point. Deloitte, for example, publishes sample US GAAP financial statements and disclosure language for emerging companies here.

As an alternative, you could find several 10-K Filings from public companies with similar businesses and use them as a point of reference. Peer filings may be used to understand common styles, common formatting techniques, and table design. For the best experience, you could use the Microsoft Word application to open an existing filing of a peer company saved as an “.html” file as follows:

1. Save the filing as a file with an .html extension.

2. Open Microsoft Word

3. Chose “File” > “Open” > “Browse” > Select the file > “Open”

4. Click the “Enable editing” button.

5. Save the opened file as a new Word document. Choose “File” > “Save As” > Select File Type as “.docx”

Use these materials to build an initial structure of your financial statements. Once requirements are defined, select a reporting tool appropriate for the complexity of the organization’s operations:

• BalanceWare and TickMark can support smaller teams that prepare complete financial statements and footnotes for private companies. These tools help transfer information from the trial balance and supporting schedules into publication-ready financial statements.

• The ACRA XBRL Tool addresses a different regulatory environment. It can help users become familiar with XBRL tagging and prepare filings required by Singapore’s Accounting and Corporate Regulatory Authority.

• SEC registrants generally require more advanced enterprise disclosure-management capabilities. ActiveDisclosure and Workiva are examples of platforms designed to support public companies.

Question 2. What are useful applications of agentic AI in the financial reporting process?

Agentic AI is most effective when the work can be decomposed into defined steps and evaluated against explicit requirements.

• Annual risk assessment documentation drafting.

• Drafting a summary of SOC reports of service providers relevant for financial reporting.

• Improvement of existing processes and workflows, including finding automation opportunities.

• Reviewing draft financial statements. For the initial review of footnotes, you can use my custom GPT here (requires a ChatGPT Enterprise or ChatGPT Pro subscription to run as intended). This agent can perform an initial review for:

  • Mathematical inconsistencies.

  • Missing or incorrect references.

  • Inconsistent use of terminology.

  • Undefined abbreviations.

  • Differences between tables and narrative disclosures.

  • Items with unclear period changes that cannot be easily rolled forward that could prevent investors from properly understanding the financial position and results of the business.

Question 3. How to apply alternating row shading automatically in Excel?

Use conditional formatting rather than manually filling every second row.

For a statement occupying cells {A8:K200}:

1. Select the range A8:K200.

2. Click Home > Conditional Formatting > New Rule.

3. Select Use a formula to determine which cells to format.

4. Enter:

=MOD(ROW()-ROW($A$8),2)=0

1. Open the formatting settings and select the required fill.

2. Apply the rule.

The formula shades every second row beginning with row 8. When rows are inserted or deleted within the range, Excel automatically recalculates the pattern.

A light fill, such as #CCEEFF, can improve readability and matches the color scheme traditionally used for alternative row backgrounds. The final color should align with the organization’s branding guidelines.

Question 4. How to determine whether all required disclosures have been included in the consolidated financial statements prepared under US GAAP?

Disclosure checklists are available through accounting research platforms such as CCH® Accounting Research Manager® and Thomson Reuters. Preparers can typically request their external auditors to provide the disclosure checklist applicable to the industry in which they operate. It is advised to always use the most recent version of the disclosure checklist for the applicable accounting framework and reporting period.

This process turns the checklist from a reference document into a completeness control.

Peer benchmarking provides a useful second layer of review. Services such as Active Intelligence by DFIN or Intelligize from LexisNexis allow users to search public filings and compare disclosures made by similar organizations.

Peer filings can help identify relevant market practices but should not determine accounting conclusions. Applicability must remain grounded in the governing accounting and regulatory requirements.

Question 5. How to make financial statements in Word to update directly from Excel?

A basic solution available to Microsoft Office users is to link Word documents to supporting Excel schedules. This approach can support both tabular disclosures and individual numbers pasted within narrative disclosures.

Linking an Excel table to Word

1. Copy the required table or range in Excel.

2. In Word, select Home > Paste > Paste Special.

3. Select Paste Link.

4. Select Microsoft Excel Worksheet Object.

Linking an individual amount

1. Copy the relevant Excel cell.

2. Position the cursor in the required Word paragraph or footnote.

3. Select Home > Paste > Paste Special > Link & Merge Formatting

   

Refreshing the report

Linked amounts can generally be refreshed by:

• Right-clicking the linked object and selecting Update Link; or

• Updating links when the document opens.

The process may vary depending on a specific version of Microsoft Office you use. Although this method can reduce manual data entry, it comes with significant limitations. After adding references to an Excel file, editing becomes difficult because continuous updates in the Word file can consume a significant portion of processing capacity. Besides that, this approach makes it difficult for multiple people to work on the same file without breaking links.

As the organization moves to a greater level of enterprise complexity, a transition to Workiva or another workflow solution is recommended.

Question 6. How should financial statement rounding differences be handled?

A useful approach is to address rounding differences on the balance sheet by adjusting a line item other than Retained Earnings, preferably one that does not require roll-forward schedules.

Rounding issues can be handled as follows:

1. Split the trial balance to include all splits that will be disclosed. So if we have service revenue from a single largest customer, the respective revenue account should be split into 4 lines:

   1. Service + Largest customer (Q1)

   2. Service + Others (Q1)

   3. Non-service + Largest (Q1)

   4. Non-service + Others (Q1)

In practice, use an MTD or QTD trial balance to split balances by period and establish separate accounts for all amounts presented in the footnotes. Amounts that are never disclosed should be categorized accordingly.

1. Retained earnings should be split into beginning retained earnings, P&L for the current year, dividends, and reclassification/amortization of AOCI.

2. Aggregate accounts based on the full mapping path.

3. Order so that the last item is designated for rounding.

4. Calculate the extra column needed for the cumulative balance technique.

5. Change the presentation unit in the second extra column and round the cumulative balances accordingly.

6. Add a final column in the unit of presentation and replace the cumulative basis with an individual balance basis denominated in the unit of presentation.

7. Compute values that show periodic changes in BS and periodic P&L balance for the specified period, by deducting a similarly computed number for the previous period.

8. Repeat the exercise with the cumulative technique.

9. Aggregate rounded numbers in the presentation denomination that pertain to the same item.

10. Use these numbers to populate periodic financial statements. All roundings should be handled.

This technique controls the total because each displayed amount is derived from the rounded cumulative series.

Periodic changes should be calculated from full-precision balances before rounding. Using rounded source balances can create avoidable inconsistencies.

One useful tip is not to use retained earnings to balance the balance sheet. Where a residual allocation is necessary, use a designated financial statement line that does not distort the results or interfere with any roll-forward accounts.

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Question 7. Why do free-form drafting prompts produce weak footnotes?

Free-form prompts asking AI to draft footnote content for financial statements often produce unsatisfactory results. The excessive discretion afforded by these prompts increases the ambiguity of the active environment in which the agent operates. A free-form request gives the model too many opportunities to make unsupported choices. As a result, this causes low-quality output.

Better results come from constraining those choices. This can be achieved by reminding the model that financial statement footnotes exist within the rigid requirements of an applicable reporting framework. These requirements must be applied to entity-specific facts and circumstances to include all necessary material facts and circumstances while also maintaining universal presentation. This reporting framework and entity-specific facts both need to be defined and applicable provisions referenced in the inputs provided for the inference.

Examples are particularly important. The instructions should explain which elements of the examples may be adapted. However, suitable examples may not always be readily available, so users may rely on a chatbot to collect examples as needed.

Overall, providing examples of required footnote disclosures and detailed guidance on how to custom-tailor those to your case is the most effective way to ensure that the output is appropriate.

Useful life is the period during which management expects an asset to contribute economic benefit to the reporting entity. The estimate depends on the expected use of the asset population within the entity’s operating environment.

Some useful resources that can inform this estimate include industry studies, peer company disclosures, and analyst research. They provide evidence about asset capabilities and the range of observed useful lives. However, management must evaluate that evidence against the characteristics and expected use of its own assets.

This article explains the depreciation principle governing useful life, evaluates the relevance of external evidence, provides an entity-specific assessment framework, and identifies the circumstances that require reassessment.

1. What principles govern depreciation?

Depreciation systematically allocates the depreciable amount of a long-lived asset over its useful life. PwC characterizes depreciation as “a process of allocation, not of valuation.”

The allocation period reflects the reporting entity’s expected use of the asset. Physical capability beyond that period does not extend useful life when management expects to retire, replace, or otherwise cease using the equipment earlier.

Useful life is the estimate of the period over which the reporting entity expects to derive economic benefit from the asset. The estimate should therefore reflect the expected retirement date of the relevant asset population rather than the maximum period during which the physical item of equipment could remain operational.

For servers, depreciation begins when the equipment has been delivered, installed, configured, connected to the required infrastructure, and made available for its intended use (when the asset is “placed in service”). Depreciation ceases when the asset is disposed of or otherwise reaches the point at which the applicable requirements end depreciation.

Because useful life reflects the reporting entity's expected use, an industry-wide estimate cannot determine the appropriate period without evidence regarding the entity’s own assets and operating plans.

2. What does the available external evidence indicate?

External evidence provides context regarding the range of potentially supportable useful lives and the factors that cause estimates to differ. In 2024, the American Society of Appraisers Machinery and Technical Specialties Committee estimated a normal useful life of five to eight years for data-processing equipment, including routers, servers, and storage assets [2]. The study observed that the slowing rate of improvement associated with Moore’s law may have modestly extended average server lives. It also found that useful lives differ among hyperscale, colocation, enterprise, and telecommunications data centers because those operating models have different asset-turnover requirements.

Several public companies have adjusted the estimated useful lives of certain categories of server hardware to approximately 5 or 6 years. Some investors and analysts consider these periods too long for GPU-intensive infrastructure and support useful lives of two or three years for specific assets [5], [6], [7], [8], [9].

Other analysts support useful lives closer to six years based on recent industry developments and available empirical evidence [3], [4].

However, none of these views were authoritative. Further, based on a review of a broader sample of public companies filing their financial statements with the SEC, we observed that useful lives beyond three years may be supportable for certain server categories as the appropriate period varies by asset type, workload profile, operating model, and replacement strategy. The estimate therefore requires an entity-specific assessment, and none of the positions taken by analysts is appropriate for the industry as a whole.

3. How should management determine the useful life?

Management should estimate useful life by determining how long the relevant asset population is expected to remain productive within the entity’s operating environment.

The assessment should address four categories of evidence.

a. Future operating plans

Long-term empirical evidence for modern AI accelerators remains limited because the market is relatively young. Earlier accelerator generations, including NVIDIA V100-class GPUs and early TPU deployments, nevertheless indicate that specialized compute assets can remain operational for multiple years when supported by appropriate architecture, interconnect capacity, cooling, maintenance, and workload allocation.

A server that is no longer efficient for frontier model training may remain suitable for:

• inference;

• training smaller models;

• testing;

• internal development; or

• other workloads that do not require the latest hardware generation.

Workload migration can preserve economic utility after the equipment ceases to represent the highest-performing technology available. As such, management should identify the workloads the equipment is expected to perform throughout the proposed depreciation period when determining useful lives.

However, continued technical capability provides limited support when approved operating plans indicate that the asset will be retired earlier. As such, the next category of evidence is operational plans.

b. Operational environment

Management should evaluate whether the equipment is expected to remain operational within the entity’s environment.

Relevant evidence includes:

• physical condition and expected reliability;

• maintenance requirements and availability of replacement parts;

• continued support;

• network, storage, and interconnect compatibility;

• power and cooling requirements; and

• the existing data center infrastructure's capabilities to support continued use.

A loss of vendor support or infrastructure compatibility may shorten useful life even when the equipment remains physically operational. The analysis should therefore consider the full system in which the server operates rather than the processor in isolation.

c. Replacement economics

Retirement decisions depend on the overall economic impact of continued use versus replacement. A newer server may offer higher processing speed, greater memory capacity, improved energy efficiency, or better interconnect performance. Those improvements affect useful life when they change management’s expected replacement timing.

Management should compare the incremental benefit of replacement with:

• procurement cost;

• installation and configuration cost;

• operating-cost differences;

• cost of service disruption needed to install and configure servers;

• cost of infrastructure modernization (related network, power, and cooling changes); and

• available data-center capacity.

An existing server may remain productive when the incremental cost of continued use is lower than the cost and disruption associated with replacement. Power availability and data-center constraints may also affect timing. A technically superior replacement may require infrastructure that is unavailable or uneconomic to install during the proposed period.

The estimate should therefore reflect management’s approved replacement strategy and the economic conditions underlying that strategy. However, another important source of evidence we have not yet covered is the consistency between management’s expectations and past experience and future plans.

d. Past experience

Historical retention and retirement patterns provide evidence about expected use.

Management should consider:

• how long the entity has retained comparable equipment;

• the age at which similar assets were retired;

• the reasons for prior disposals;

• current capital-expenditure plans;

• approved replacement schedules.

A history of disposing of similar equipment before the end of its estimated useful life may indicate that the current estimate is too long. Significant gains and losses from the disposal of servers strongly suggest that the useful life or salvaged value estimates used in calculating depreciation need recalibration.

Historical experience may become less relevant when the entity’s plans include significant changes in its operations. The best practice is to document the rationale of any known departure from prior experience, explaining why earlier retirement behavior no longer represents the expected use of the current asset population.

These four categories of evidence (future plans, operational environment, replacement economics, and past experience) should provide robust support for an expected retirement date.

Management should document the basis for the estimate to also explain why external studies or peer-company practices are relevant to the entity’s circumstances. A peer-company estimate provides limited support when the companies have materially different workloads, infrastructure, utilization patterns, or replacement strategies. Where management selects a useful life outside an observed industry range, the analysis should explain the entity-specific evidence supporting that result.

5. When should management reassess useful life?

Useful life is an accounting estimate. New information or changes in circumstances may alter management’s expected period of use between acquisition and disposition. Management should reassess the estimate when facts and circumstances indicate that the expected retirement date may have changed.

Relevant indicators include:

• Sustained reductions in utilization, workload changes, or removal from planned uses;

• Physical deterioration or loss of vendor support;

• Expected modernization of infrastructure that is incompatible with assets;

• Significant deviations of past experience from related estimates (i.e., actual retirements occurring materially earlier or later than expected).

• Technological developments that materially change operating costs, replacement benefits, or the expected use of installed assets

A change in useful life affects depreciation prospectively. The remaining depreciable amount is allocated over the revised remaining useful life.

Management should also evaluate whether the same facts indicate impairment, abandonment, or disposal. A useful-life revision changes the future allocation period. It does not address circumstances in which an asset is no longer recoverable or is expected to be abandoned.

Conclusion

Useful life is primarily estimated based on entity-specific evidence. This is why management should consider many facts and circumstances to appropriately determine useful lives of servers. Management should update the estimate when changes in facts and circumstances alter the expected productive-use period.

Sources

1. “Depreciation” term definition as per FASB ASC 360-10-35-4

2. “Estimated Normal Useful Life Study [Ver. 1/24]” by ASA – Machinery & Technical Specialties Committee, 2024 [URL]

3. “GPU Obsolescence is Complicated” by Dave Friedman [here]

4. “Resetting GPU Depreciation — Why AI Factories Bend, But Don’t Break, Useful Life Assumptions” By David Vellante, “Breaking Analysis”, Issue 298, November 22, 2025 [URL]

5. Michael Burry [here and here].

6. “Big Tech’s Deteriorating Earnings Quality” by MBI Deepdives [here].

7. “Depreciation of GPUs: between useful lives and useful myths” by Olga Usvyatsky, Deep Quarry [here].

8. “Amazon’s AI Reality Check” by Stephen Clapham [here].

9. “CoreWeave and the Never-Ending GPU Depreciation — A Masterclass in Accounting Elasticity” by Kakashii [here].

Vendors increasingly market auditable fair-value products rather than simple reference prices. It is obvious that the ability to support a fair value conclusion in a defendable and compliant manner is in demand. Pricing providers have largely built their products around liquid assets traded in observable markets. Illiquid or non-standard holdings create a different evidentiary problem because management may need to support the fair value measurement with unobservable inputs. Valuation of unusual holdings remains an area for exploration. Other common considerations and challenges relate to:

• Determining a specific price (ask, bid, or mid),

• Clarifying the cut-off timing, and

• Providing adequate support.

This post focuses on the following related questions:

1. How should an entity identify the principal market for a crypto asset?

2. How should management account for the bid-ask spread on a crypto asset?

3. How should management select the cut-off time for crypto fair value measurements?

4. How should management assess the reliability of a crypto pricing source?

5. What evidence should pricing vendors provide to support audit-ready fair value measurements?

6. When should a pricing vendor be evaluated as a service organization?

7. Where can reporting teams learn more about crypto asset valuation?

1. How should an entity identify the principal market for a crypto asset?

The principal market is the market with the greatest volume and level of activity for the asset. This should be the market that the reporting entity can access. A market that the entity cannot access cannot be the principal market for that entity’s fair value measurement. Hence, that analysis is entity-specific.

A reporting entity does not need to perform an exhaustive search of all possible markets, but it does need to consider the markets it can access and the information reasonably available to it. In the absence of evidence to the contrary, the market in which the entity normally transacts is presumed to be the principal market.

Tokens, whether well-known or less well-known, are traded on many exchanges with varying liquidity and access restrictions. When an accountant looks up the price of an asset on CoinGecko, they obtain a price aggregated from multiple data sources, not necessarily those to which the reporting entity has access. However, the disaggregated view of prices by exchange/source provided by CoinGecko is a useful resource for initial analysis, provided that the reliability and accuracy of this data are assessed and found to be appropriate prior to using such pricing in the financial reporting process.

In the absence of evidence to the contrary, ASC 820 presumes that the market in which the reporting entity normally would sell the asset is the principal market. The entity does not need to perform an exhaustive search for all markets, but it must consider reasonably available information.

If no principal market exists, the entity uses the most advantageous market. Note that transaction costs may be considered in identifying the most advantageous market, but they are not deducted from the fair value measurement itself. For crypto assets, the practical analysis should focus on access, trading volume, market depth, liquidity, trading restrictions, and the orderliness of observable transactions.

The conclusion should be reassessed when facts change. A change in exchange access, jurisdictional restrictions, liquidity, or market activity may result in a change in the principal market or require additional fair value analysis under ASC 820.

2. How should management account for the bid-ask spread on an asset?

Under ASC 820, the entity should use the price within the bid-ask spread that is most representative of fair value in the circumstances. Selecting the fair value from the bid-ask spread is more nuanced than either blindly accepting the first visible quote or dismissing bid-ask information altogether. A systematic pricing convention, such as midpoint pricing, may be appropriate when applied consistently and reflects market-participant assumptions.

3. How should management select the cut-off time for crypto fair value measurements?

A reporting entity should select a cut-off time that aligns with its reporting process and apply that convention consistently from period to period.

Crypto markets trade continuously, and prices can move materially outside regular business hours. A valuation taken at midnight UTC may differ from a valuation taken at midnight Eastern Time. A valuation taken at the start of an hour may differ from a valuation taken several minutes later.

The selected cut-off should be documented in the entity’s valuation policy. The policy should specify the time zone, time of day, pricing source, and methodology used at that timestamp. It should also describe how management will address market disruption, missing data, delayed feeds, and other exceptions.

Consistency is a key. A reporting entity should avoid changing the cut-off time to achieve a preferred valuation result. Changes to the cut-off convention should be supported by documentation demonstrating that such changes were justified and properly authorized.

4. How should management assess the reliability of a crypto pricing source?

A pricing data vendor is supposed to deliver to its customers observable market price data. However, what exactly has been “observable” is not always clear.

There are several ways to assess the reliability of externally sourced information that complement one another and can be used together or separately, depending on the extent and persuasiveness of the evidence already produced. This includes gaining an understanding of the vendor’s processes and methodologies, using this understanding to reconcile with peer and/or source data, and completing independent verification by recomputing results or a sample of pricing data points.

Several vendors now offer fair-value pricing,but end-to-end solutions for harder issues still do not exist for the following gaps:

1. Visibility into principal-market assessment and how it is tailored to the specific reporting entity, particularly due to access restrictions (e.g., South Korean exchanges restrict access of foreign investors), or the applicability of presumed principal market rule due to the fact that the entity normally transacts on a specific exchange (even though other markets might have a greater volume or be more advantageous, the reporting entity is not required to perform an exhaustive search across other markets where it does not normally transact).

2. Use-case differentiation (fair value of an asset often fluctuates prior to cut-off date; hence, when evaluating the fair value for a specific transaction rather than period-end, it might be more appropriate to use the fair value as of the date and time of such transaction).

3. Valuations of the portfolio of restricted assets, thinly traded tokens, NFTs, SAFEs, illiquid coins, or positions that require manually calibrated inputs.

4. Preservation of raw data support, its sources, and exception history in a testable format.

Management should also evaluate trade completeness when the pricing methodology relies on executed trades. Missing trades can affect last-trade pricing, VWAP, TWAP, and other analysis. For exchanges that use sequential trade IDs, a pricing vendor should be able to identify sequence gaps, attempt to recover missing trades, and document whether unresolved trade IDs were confirmed by the exchange to be non-existent.

5. What evidence should pricing vendors provide to support audit-ready fair value measurements?

A pricing output should be supported by evidence that can be inspected after the reporting date. A reporting entity should be able to explain which pricing source was used, why the source was appropriate, how pricing data points were extracted, what criteria were used to identify exceptions, whether exceptions were identified, and how those exceptions were resolved. It requires a documented, consistent, and thorough process methodology.

For audit purposes, management will often need to support the appropriateness of both the methodology and the data used in the accounting calculation.

Methodology support may include:

• The reporting entity’s internal valuation policies;

• the vendor’s pricing methodology document, including the applicable version and effective date;

• the vendor’s data governance policies; and

• An internal memorandum summarizing management’s assessment of whether the vendor’s methodology is consistent with FASB ASC 820 and the reporting entity’s internal policies, including how management addressed any known misalignment.

Data support may include:

• System-generated reports or other records showing the relevant pricing data; and

• Settings, filters, timestamps, asset identifiers, and other extraction parameters are used to retrieve pricing data from the vendor system.

For trade-based methodologies, support should also address the completeness of the underlying trade population. Management should retain evidence showing either that the trade population was complete or that any missing trade IDs were investigated, resolved, and verified at the exchange level.

Many pricing providers still lack accounting-focused governance processes. Data governance is therefore one of the clearest differentiators in this market. Lukka and Coin Metrics, both well-known platforms in the digital asset pricing market, are notable for their documented approaches, including formalized data governance processes and pricing methodologies.

6. When should a pricing vendor be evaluated as a service organization?

A pricing vendor should be evaluated as a potential service organization when the vendor’s processes and controls, rather than only the data delivered, are relevant to the reporting entity’s financial reporting process.

A pricing vendor generally should not be treated as a service organization when the entity has internal processes to validate and verify pricing data received from the vendor, and those processes operate at a sufficiently precise level.

Management should treat the pricing vendor as a service organization when it relies on the assumption that the vendor follows its stated methodology in practice, or that the vendor’s internal procedures are effective in identifying and resolving outliers and exceptions.

In those circumstances, the entity is relying on vendor controls. Management may therefore need additional procedures to obtain evidence about the operating effectiveness of those controls at the service organization. A SOC report may be useful for this purpose. If the pricing vendor does not have a SOC report, management should implement adequate compensating controls within its own organization.

7. Where can reporting teams learn more about crypto asset valuation?

We note that many users of fair value information might experience issues when first encountering fair value questions. This often results in fund admins and auditors being unable to articulate the specific assumptions and inputs they require to value an asset. This creates a massive opportunity for educational and methodological advisory services. Here are a few resources that we think will be valuable to anyone dealing with this problem:

• “Token Design” by Roderick McKinley [here] provides an in-depth understanding of how tokenomics affects the value of cryptoassets.

• “Accounting and auditing of digital assets. Practice Guide” by AICPA [here] for non-authoritative answers to common practical questions.

• Pricing data vendors that, in our experience, appeared to provide the most useful functionality and in-depth understanding of the accounting standards requirements include:

  • Koinju

  • Lukka

  • Coin Metrics

Key takeaways

• The fair value measurement process produces reliable data when it relies on robust governance mechanisms.

• Principal market determination and the fair value for crypto assets are entity-specific.

• Pricing data aggregators provide information that is insufficient for accounting.

TechAccountingPro can assist with the practical implementation of fair value. Contact us if your team is:

• Evaluating a pricing provider’s methodology for compliance with FASB ASC 820.

• Drafting internal valuation policies and procedures.

• Need assistance in responding to auditor questions.

The repository brings together authoritative sources, accounting firm guidance, technical newsletters, practice resources, and selected data references into a single, organized research index.

It is intended for professionals working on complex accounting and reporting matters, including revenue recognition, business combinations, consolidation, leases, financial instruments, SEC reporting, IFRS comparison, accounting policy development, and financial statement disclosures.

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The resource includes materials across several areas:

• FASB, IFRS, SEC, and AICPA resources
• Major accounting firm reference libraries
• Big Four accounting and reporting guides
• Technical guides from other national and regional firms
• Accounting newsletters and technical blogs
• Profession, practice, and career resources
• Selected data sources

The repository is open for use and contribution. I welcome suggestions for authoritative, stable, accessible, and useful resources to support research in technical accounting and financial reporting.

You can see this list as a GitHub repo or a website.

Traditional internal control frameworks are often implemented as if resources are abundant.

COSO 2013 and similar frameworks were designed for broad applicability. In practice, however, they are often translated into layers of approval, restricted access, formal review, and documentation. This approach may work for mature organizations with stable processes, large teams, and visible agency problems. It does not always work for startups.

Startups operate in a different environment. They have limited resources, incomplete processes, changing products, and high information velocity. In this environment, excessive oversight can create a new control problem. It can slow decisions, fragment information, and prevent employees from seeing the operational context needed to identify risk.

This creates a practical question. Could excessive administrative oversight introduce more issues than it intends to solve? To answer this, we need to reconsider the assumptions behind internal controls.

If those assumptions deserve reconsideration, materiality is the right place to begin. Startups do not operate in the same decision environment as mature companies, so the logic of control scoping should not be assumed to transfer automatically.

Materiality

Investors in startups frequently place more weight on nonfinancial indicators such as market reach, product development milestones, user engagement, retention, developer activity, protocol usage, and other signals of future scale. Financial results may matter, but they may not yet explain the company’s valuation or capital allocation story. Traditional financial reporting practices, therefore, risk misleading rather than guiding the public.

McKinsey’s “Valuation Guide” makes a similar point. For internet companies in the late 1990s, investors relied heavily on nonfinancial metrics because early financial results were not yet connected to long-term value creation. As those companies matured, financial metrics became more predictive, while nonfinancial metrics lost explanatory power.

Nonfinancial metrics are useful only when they explain economic value better than financial metrics alone. If a company cannot translate users, page views, subscribers, protocol activity, or product milestones into profits and cash flows, the nonfinancial metric becomes less useful. It may describe activity, but it does not necessarily support valuation.

For startups, this distinction has direct implications for internal controls.

If users of the company’s information are unlikely to change their capital allocation decisions based on financial metrics alone, then a traditional financial materiality threshold may not capture the real decision-useful risk. For many startups, the more significant issue is whether the company can sustain growth, validate its product, retain customers, meet technical milestones, and maintain the integrity of the operating data used to support those claims.

This does not mean financial reporting is irrelevant. Rather, it means that the control framework must reflect the actual decision environment. For startups, materiality should not be limited to financial metrics. It should be a dynamic measure that considers both financial and nonfinancial indicators that could reasonably influence users of the company’s information.

This leads to a reasonable question. Should traditional oversight models also be reconsidered? If the startup decision environment differs, the design logic of internal controls may also need to change.

Segregation of Duties

One of the clearest examples of inherited control logic is segregation of duties. We have traditionally been taught that segregation of duties is essential for avoiding fraud and errors. But is it always necessary?

Segregation of duties can be highly effective when it separates incompatible responsibilities that create a direct risk of misappropriation, unauthorized postings, or self-review. But it can also cause context loss, information bottlenecks, and additional failure points in the process.

This is the central problem. A control that looks strong in form may become weak in substance if it deprives the control owner of the information needed to understand the transaction.

In practice, startups and small businesses can often sustain a relatively strong control environment through close collaboration and direct accountability, even where formal segregation of duties is limited.

We learned that where people have a sense of belonging to a team and feel responsible for the effective use of the company’s (limited) resources, teams are likely to operate at their best even without proper segregation of duties. In other words, teams in resource-constrained environments often perform optimally through direct, shared accountability rather than rigid administrative separation.

That does not mean startups are immune from fraud or error. It means only that segregation of duties should be evaluated as a targeted response to a specific risk, not as a universal design requirement.

We also learned that segregation of duties cannot compensate for a control environment that rewards the wrong behavior. Wells Fargo1 is the clearest example. The bank had extensive control structures, yet distorted incentives and weak upward escalation allowed misconduct to persist. The lesson is straightforward: structural separation becomes worthless once the organization rewards conduct that defeats the purpose of the controls.

Three practical failures of the broad adoption of practices relying on segregation of duties are especially important:

Context loss.
When impairment testing is treated as confidential information, executives may share only a screenshot or a summary with accounting personnel and ask them to record the entry. The accounting team may complete the task, but it cannot evaluate the assumptions, challenge the completeness of the analysis, or assess the reporting consequences. In that case, segregation of duties becomes the source of context loss.

Restricted information flow.
When read-level access is limited to the minimum information needed to perform a narrow task, employees lose the ability to see the transaction in its broader operational setting. The company may think it has improved control. In reality, it may have weakened collaboration and reduced the likelihood that someone would identify an inconsistency before it becomes a problem.

Additional process failure points.
Segregation can also add failure points to the control process itself. Consider separating journal entry preparation and review. That design works only if the company has a reliable mechanism that prevents the close until all required reviews have actually occurred. If no such mechanism exists, the review layer can become false comfort. In some cases, a stronger control is a structured preparer checklist that requires support for account selection, amount, cutoff, classification, and policy conclusion before the entry is posted.

The issue is whether traditional control design can misfire when applied in organizations that lack abundant administrative capacity, depend on fast information flow, and cannot afford context fragmentation.

Segregation of duties remains critical in environments involving the custody of third-party funds (fiat or crypto) and transactions that require significant judgment. That is especially true for banks, neobanks, custodians, and other financial institutions. In routine processes such as simple account reconciliations, the case for formal separation is often weaker.

Why Traditional Frameworks Break in Startups

Traditional frameworks are conceived from the perspective of a steady-growth organization with abundant resources and a known agency problem (namely, that management might not be incentivized to act in ways that create the most value for shareholders). Startups often have neither. As a result, the control form can overtake the control substance.

Based on our experience, the risk of material misstatements is higher in companies that are either (a) declining or slowing down, or (b) under significant pressure to grow. Both are features of an environment in which the inability to admit the issue lies the foundation for, and becomes the root cause of, subsequent misstatements and fraud in these organizations. This is why we highlight the importance of transparency and open access to context.

Finally, we want to highlight that the solution we propose below requires the organization to implement radical transparency protocols that will, naturally, reduce its ability to exercise its right to privacy. However, we believe our approach will benefit the public in general and businesses that adopt it.

This is why startups need a control framework built without

Startups need a control approach that does not rely on assumptions of redundancy, surplus personnel, or resource abundance. That is the purpose of the non-abundant approach.

Non-Abundant Approach

The non-abundant approach is built for startups that lack the administrative resources assumed by traditional control frameworks. It focuses on the conditions under which internal controls remain effective when resources are scarce.

In practice, the approach depends on six considerations

1. Materiality & Priorities

Control design should begin by defining what information actually matters to users of internal and external reporting. For startups, that often includes annual recurring revenue, customer churn and retention, runway, developer activity metrics, product milestones, and other operating indicators that shape investment and management decisions.

Management should determine which financial and nonfinancial metrics are decision-relevant, why they matter, which processes affect them, and what kinds of failures could change a user’s judgment.

2. Context Access

Restricted contextual access weakens the control owner’s ability to assess risk reliably. A non-abundant approach depends on informed judgment. People responsible for executing controls need sufficient context to understand the transaction, the surrounding facts, and the reporting consequences.

The company should adopt radical transparency as a default operating principle. This allows broad access to supporting information for accounting, finance, legal, operations, and management personnel involved in executing controls. Contracts, technical accounting analyses, board materials, valuation reports, DCF models, and projections should remain available to the people responsible for evaluating reporting risk.

3. Controls

Once materiality and context are in place, the company should prioritize preventive controls at the point of potential failure. Process-level controls are stronger than broad management reviews that rely on generic control objectives.

For software capitalization, for example, developers’ work should be approved for payment only after the project phase has been assessed and documented, together with technical feasibility and the types of costs eligible for capitalization under US GAAP. Its effectiveness derives from intervening before the risk can be inadvertently realized.

4. Escalation Protocols

A non-abundant approach relies on targeted escalation rather than long chains of formal review. Initial responsibility for escalation should rest with the person who first identifies the issue.

Escalation should be triggered by the likelihood and magnitude of material misstatement or significant waste. That allows the response to remain proportionate to the risk.

5. Transparency

This principle addresses one of the primary roots of material misstatement: the organization’s inability to admit what is happening once facts begin to contradict the preferred narrative. A sound control environment permits those facts to be reported, evaluated, and acted upon. The management team should have an established routine for identifying contradictory facts and addressing them during monthly close, business performance reviews, or other similar activities.

6. Monitoring

Management should establish regular review routines that combine issue identification, response design, and follow-up. A non-abundant approach depends on management’s ability to quickly identify emerging problems, assign responsibility, evaluate the response, and monitor whether the response resolved the issue.

Practical Implementation of the Non-Abundant Approach

Assume a SaaS startup has limited finance headcount and no formal segregation of duties between payment processing, journal entry preparation, and bank reconciliation.

A traditional design may require separate individuals to process invoices, authorize payments, disburse funds, post journal entries, review entries, prepare reconciliations, and approve reconciliations. In particular, each of the following activities might need to be performed by a separate individual under traditional views:

1. Processing incoming invoices by verifying the validity of the claim against actual service usage or other existing contractual obligations, confirming vendor payment details, recording the invoice in the ERP system, and initiating the payment authorization request.

2. Authorizing, denying, or escalating payment authorization requests upon review of requests received against authorization limits, internal policies, contracts, proof of delivery, and other support documentation received.

3. Disbursing funds to make a payment on all approved payment requests.

4. Posting a journal entry for payment (or a clearing journal entry for automated bank postings).

5. Approving a journal entry submitted by a preparer.

6. Preparing the bank account reconciliation that includes the payment transaction.

7. Reviewing and approving the bank account reconciliation.

As you can see, it takes 7 accountants to make a single vendor payment. For an early-stage company, that structure may be impossible to sustain.

A non-abundant approach begins with the actual risk. The most important question is whether one person can process a significant disbursement from start to finish without visibility, escalation, or meaningful review by management.

That risk can often be addressed more precisely. The company may require separate authorization for significant payments, maintain transparent access to disbursement activity, use standardized process documentation, apply clear authorization thresholds, and require escalation when payments exceed policy limits or involve unusual facts.

Under those conditions, a single accounting employee may be able to perform multiple routine steps in the process without undermining the control environment. Resources are then concentrated where judgment, concealment risk, or payment significance make a stronger structural separation necessary.

This approach preserves control substance without requiring an administrative structure that the business cannot sustain.

Note. If you want to learn about specific types of risks that often are left unaddressed by startups in the web3 space, refer to our audit readiness checklist.

Conclusion

Traditional oversight assumes that organizations have administrative resources and capacity that many startups lack. The non-abundant approach addresses this issue by organizing internal control around materiality and risk considerations. The purpose is to ensure that every control addresses only identified risks that are relevant and material, whether in quantitative or qualitative terms, alone or when aggregated with other risks. This approach creates space for innovation and growth for companies with limited resources and may become a genuine competitive advantage for companies that adopt it.

That decision deserves more scrutiny than it may receive.

The Board considered several NFP issues, including consolidation under Subtopic 958-810, and concluded that none justified a standard-setting project at this time.

I think that was the wrong call.

Nonprofit consolidation guidance is unclear. It allows sophisticated organizations to easily structure around consolidation, leaving users with financial statements that do not reflect the full picture of the business.

Not every point deserves a place on the board agenda, but nonprofit consolidation should not be dismissed as a niche technical matter. It is a structural reporting issue that affects many public issuers: Salesforce, Monday.com, Circle, Upwork, Akamai Technologies, and the list goes on.

I would like to reiterate that the current guidance on the consolidation of nonprofit entities is the biggest loophole that allows any business to easily abuse accounting rules. It is notable that on June 12, 2026, Accounting Today reported that US non-profit foundations are showing strong growth, with more than $2 billion in assets now held by these organizations. Yet the issue remains not pervasive.

In our work, we used agentic AI tools to help build an SAFT valuation template that analyzes legal terms, identifies economic assumptions, assesses scenario outcomes, and incorporates calibration logic. The result is a structured operating model that web3 finance teams can use to update SAFT valuations in response to changes in the economic environment and the entity’s facts and circumstances.

A calibrated scenario model can help management estimate changes in fair value after acquisition. The process starts with the deal terms at inception, calibrates to the transaction price, then updates probabilities and outcomes at each reporting date. This produces a more defensible fair value estimate for SAFTs, even when token delivery remains contingent.

SAFT Recalibration Model

13.1KB ∙ XLSX file

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This file shows an illustrative calculation of SAFT contract value recalibration in accounting periods subsequent to the investment.

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By anchoring the model to the original transaction and updating assumptions at each measurement date, companies can build a more consistent and auditable fair value process. The approach gives finance teams a repeatable process where they previously had a valuation gap. It also applies calibration discipline to instruments that were often left at cost until a major event forced a reset.

Used properly, with appropriate governance, expert review, and quality control, agentic AI tools can help create structured data that captures contractual terms, improve documentation, and support more accurate financial reporting.

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CECL Minimum Allowance Handout

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Estimating the minimum amount of current expected credit loss allowance in a scenario where the company had no previous history of write-offs or customer defaults.

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When the facts support recognition before claim, the timing should be tied to the completion of the validation activities that give rise to the reward and to the point at which the amount of consideration becomes known or reasonably calculable under the protocol. For some networks, that may occur when a block is added to the blockchain. For others, the reward may remain constrained until the end of an epoch, era, or another protocol-defined period.

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When rewards are recognized before receipt, an entity may need to record a right to receive tokens. Under ASC 606, that right is generally presented as a receivable when it is unconditional, or as a contract asset when it remains conditional. Noncash consideration is generally measured at fair value at contract inception, so subsequent changes in token prices due to the form of consideration do not affect the amount of revenue recognized.

Accounting for post-inception price changes depends on the specific fact pattern, including whether the contract contains an embedded derivative that must be bifurcated.

The spreadsheet solution below was designed to help validators and delegators track these moving parts in a single model and support an accrual basis of accounting for staking rewards:

You can access our staking accounting template here.

This model can be reused, but it will require customization to the specific features of the networks your company operates. If you are working on setting up an accrual process for staking rewards and have questions, please reach out.

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The Board made several key decisions that could matter well beyond a narrow subset of digital asset holders:

• Include wrapped tokens within the scope of ASC 350-60, which would allow them to be measured at fair value.

• Add illustrative examples to the Codification explaining how the definition of cash equivalents should be applied in determining whether certain stablecoins should or should not be classified as cash equivalents.

• Propose annual disclosures of significant components of cash equivalents that would apply to all entities.

At its April 15 meeting, the Financial Accounting Standards Board discussed staff research and stakeholder feedback on two projects: accounting for transfers of crypto assets and the classification of certain digital assets as cash equivalents.

Wrapped Tokens and ASC 350-60

First, the Board decided to expand the scope of ASC 350-60 to include certain economically similar crypto assets, including wrapped tokens and receipt tokens, under the same fair value model as other in-scope crypto assets. The Board also decided that wrapped tokens should be disclosed separately from the underlying crypto asset.

Stablecoins as Cash Equivalents

Second, the Board considered stakeholder requests for more detailed guidance on when digital assets may qualify as cash equivalents. Rather than revising the definition of cash equivalents in the Master Glossary, the Board chose to move forward with illustrative examples. That approach keeps the existing definition in place while giving preparers more direction on how the Board expects it to be applied. Based on the Board’s discussion, those examples are expected to reinforce a high threshold, including the importance of maintaining at least 1:1 reserves in cash or traditional cash equivalents, and of a direct, on-demand contractual right to a known amount of cash.

New Annual Disclosures of Cash Equivalents

The Board also supported annual disclosure of the significant components of cash equivalents for all entities, extending well beyond the project’s original focus on stablecoins. Those decisions are expected to be reflected in an exposure draft for public comment with a 90-day comment period.

Practical Takeaways

• If your organization holds, for example, WBTC (or other wrapped tokens), those assets could fall within ASC 350-60 and be measured at fair value if the Board’s proposal is finalized. WBTC holdings would need to be disclosed separately from BTC holdings.

• The Board has not yet made decisions on crypto transfer derecognition issues.

• The Board did not change the current accounting policy election framework for cash equivalents. Your organization can elect an accounting policy to classify certain stablecoins as cash equivalents, as long as all applicable requirements set in the glossary definition of cash equivalents are met.

• The proposed annual disclosure of significant components of cash equivalents could affect all entities, not just those with stablecoin-related fact patterns. In that respect, the proposal has a broader reach than the project title might initially suggest.

Many Web3 startups underestimate how complex a financial statement audit can become.

Missing documentation, unclear accounting policies, and weak internal controls can quickly increase audit costs and delay issuance of the financial statements.

Common audit pitfalls include:
• Incomplete revenue recognition documentation
• Lack of digital asset roll-forward reconciliation
• Insufficient segregation of duties in payment processes
• Unclear accounting treatment for token issuer lifecycle
• Missing adequate support for the fair value measurements

Addressing these issues early can reduce delays, lower audit friction, and improve readiness.

We put together a checklist covering the key areas finance teams should review before the audit begins.

Download the checklist here:

Audit Readiness Checklist for Web3 Startups

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This checklist helps Web3 finance leaders prepare for financial statement audits by outlining critical considerations and common pitfalls. If you are preparing for an upcoming audit, this guide will help you identify potential issues early and reduce delays during the audit process. Many Web3 startups discover during their first audit that missing documentation, unclear accounting policies, or weak internal controls can significantly increase audit costs and delay financial statement issuance.

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Below, I share a few selected sections.

USEFUL DEFINITIONS

• Audit Overages: Additional fees charged when the audit firm discovers issues requiring work beyond the original scope.

• Opinion Shopping: Choosing audit firms based on the likelihood of a favorable opinion rather than merit.

• Reaudit Engagements: Occur when a new auditor cannot rely on a predecessor’s work, requiring re-audit of the same period.

• Process: A defined series of actions designed to produce a specific result.

• “What Could Go Wrong”: A risk point in processes that can lead to material misstatements.

• Controls: Activities that mitigate risks of financial misstatement or ensure data integrity.

• Management Review Controls: Reviews performed by management to validate financial information.

• Complementary User Entity Controls: Controls required at client entities to ensure the effectiveness of service provider systems.

REMINDERS

UNDERSTAND RESPONSIBILITIES

Management must understand that the responsibility for the financial statements ultimately lies with them. They must ensure accuracy and completeness.

CONSIDER ALTERNATIVE SERVICES

Consider whether an audit is necessary at your current stage. Alternatives such as reviews, compilations, or agreed-upon procedures may satisfy investor or regulatory needs with less complexity and cost.

IMPORTANCE OF CULTURE

Avoid “opinion shopping” (i.e., selecting an auditor that would agree with your preferred accounting treatment). Maintain a culture of integrity, transparency, and realistic expectations. Demonstrate ethical behavior and avoid the “Fake it till you make it” culture.

AUDITOR SELECTION

Consider engaging audit firms with a proven track record at the next echelon. Beware of firms whose past clients were later required to undergo re-audits. Ask prospective auditors how they ensure audit quality and avoid such issues.

PROCESSES

Have your key processes clearly defined, including procedures for identifying and addressing fraud risk. Your team should have sufficient knowledge of accounting frameworks to effectively oversee service providers’ work.

INTERNAL CONTROLS

You should have an established monthly process for Budget vs. Actual analysis and reporting reviews. Evaluate service organizations and ensure your team understands complementary user entity controls. Ensure the ability to implement and monitor them effectively.

TEAM SIZE

A dedicated accounting team is essential. Ideally, at least three individuals should be involved in payment processes to enable proper segregation of duties. Different individuals should record and post journal entries.

REVENUE RECOGNITION

• Does the company have documentation of its accounting treatment of all significant revenue streams, including how the 5-step ASC 606 model applies in each case?

• Does the company use separate accounts to hold and operate assets custodied on behalf of third parties?

• Does the company appropriately classify funding received from community grants as revenue, liabilities, or debt instruments as applicable?

• Does the company have a memo explaining the accounting treatment of revenue amounts paid to other parties? For example, for staking revenue:

  • amounts withheld as community taxes,

  • validator commission (for delegators), or

  • delegator rewards (for validators)

• Does the company accrue its staking rewards earned but unpaid at month-end? If not, does the company have a memo explaining how this accounting treatment is consistent with US GAAP?

• Does the company consider whether any amounts paid to customers are properly classified as expenses or a reduction in revenues?

• If the company follows US GAAP, has management appropriately determined the fair value measurement date for noncash consideration received? This should be the contract inception date, not the asset receipt date.

• Does the company have a process for accounting for revenue from milestone-based arrangements?

• Does the company have a process in place for prospective and cumulative catch-up adjustments posting to account for contract modifications?

• Does the entity maintain supporting documentation for customer incentives and rebate payments?

CAPITALISED COSTS

• Does the organization capitalize software development costs when required by US GAAP?

• Does the organization appropriately consider the guidance on recognition of research & development (R&D) costs when applicable?

• Does the organization have a monthly process for calculating and recording the periodic amortization expense?

• Does the organization perform a review of impairment indicators for long-lived assets, goodwill, and intangibles (including capitalized software costs, etc.)?

• Does the organization prepare monthly schedules of additions & disposals of assets created through capitalization of costs for each month in which the activity occurred?

ACCOUNTS PAYABLE

• Does the organization have a process for identifying and measuring expenses as incurred (rather than as billed or paid), and recognition of unbilled amounts as accrued expenses?

• Does the organization have a process for cut-off analysis of expenses and revenue recognized near the period-end to ensure that all such income and expenses are recorded in the appropriate reporting periods?

PREPAID EXPENSES

• Does your organization have a process to ensure prepaid expenses are appropriately deferred?

• Do you have a process in place to ensure that the deferred prepaid expenses are amortized appropriately?

• Do you have a process in place to ensure that deferred prepaid expenses are removed from the prepaid expense schedule in a timely manner once fully expensed?

COMPENSATION

• Does the organization have a process in place to recognize the costs of accrued time-off (vacation) in accordance with the company’s policy?

• If the organization had introduced an unlimited vacation policy in the past, did it appropriately consider the effects of state and foreign law provisions? For example, any accrued time off earned by employees in California cannot be forfeited and must be included in the company’s liabilities until it is paid or otherwise extinguished.

• Does the company appropriately account for stock-based compensation?

  • Does the company allocate the costs of stock-based compensation by business departments and other features used to classify the cash portion of compensation for the same employees?

  • Do you review secondary market transactions with the company’s stock to ensure that the excess of consideration paid over the fair value of stock transferred is accounted for as compensation cost unless clearly related to purposes other than compensation for services rendered?

  • Does the organization appropriately record stock awards on its books? Are withholdings of income taxes being made as required by applicable law?

  • Does the company account for stock award forfeitures as they occur or use estimates of forfeitures as allowed by ASC 718-10-35-3?

  • If the awards were modified, did the entity account for the modification by appropriately accelerating expense recognition for the previous award when such acceleration is required?

  • Does the company have a documented position on the establishment of award dates for financial reporting purposes?

  • Does the company recognize the full amount of the expense for all vested awards when the vesting date precedes the end date for the tranche amortization?

  • Does the company use the appropriate valuation methodology to measure stock awards?

  • Did the company develop the volatility assumption using the appropriate peer group and time horizon?

• Does the company appropriately account for token compensation?

  • Does the company appropriately measure the fair value of token compensation liabilities, taking into account the legal and technological restrictions in effect on the measurement date, but only to the extent that these restrictions characterize the unit of account rather than contractual restrictions specific to the entity?

  • Does the company recognize the embedded derivatives on token compensation liabilities?

  • Does the company recognize expenses related to each tranche of the award in appropriate time periods?

  • Does the company have a process to withhold and remit to tax authorities amounts of taxes due on payments made to employees under token compensation plans?

INTERNAL CONTROLS

• Does your organization have a budgeting process in place, including:

  • Cash-flow forecasts

  • Annual budgets (1 year)

  • Medium-term budgets (2-3 years)

  • Budget vs. actual variance analysis

  • Going concern evaluations

• Does the company update its valuation at least annually?

• Does your organization have a periodic risk assessment process with formal documentation of identified risks and their responses?

• Does your team understand that materiality may change in each reporting period?

• Does the organization have a list of standard monitoring activities consistently executed in each period?

• Does the organization have the appropriate segregation of duties in place and effective mitigating controls that address those situations where a sufficient level of segregation of duties does not exist?

• How do you ensure that the information produced by the entity used in control operations is complete and accurate?

• Does your organization have a process and controls in place to support the completeness and accuracy of blockchain data used for accounting purposes?

• Are the accounting policies in place for all relevant process areas?

• Does your team consistently account for similar accounting events and objects? For example, does your team have a reference list of pricing data sources for the assets you routinely operate?

• Does the organization maintain a list of peer companies and periodically evaluate its performance against them?

• Does your team have a formal list of non-GAAP accounting policy (or accounting policy conventions)? Do you perform an annual assessment of each item on this list?

• Has the company created formal process documentation, including narratives and risk control matrices, for all processes relevant to financial reporting?

• Does the company have a centralized library and unified document retrieval system that includes all accounting-related documentation?

• Does the company’s personnel follow the “document everything” mindset?

• Does the entity have a transaction value threshold that requires management to obtain the Board’s pre-approval?

• Do the entity’s policies require the Board to authorize significant related party transactions?

• Does the organization have a conflicts-of-interest policy?

• Has your executive team entered into indemnification agreements with the company without board approval?

• Have you had any known corrected or uncorrected material misstatements in your financials that the board is not aware of?

• Have you incurred losses from a cybersecurity incident that were not disclosed to the board and investors?

• Can your CEO or CFO unilaterally authorize and approve payments that exceed 5% of the company’s assets?

• Can the CEO or CFO independently prepare and send a payment to an external party without a second-person approval?

• Has the organization granted mid-term salary increases that are not tied to company performance?

• Have you ever made one-time payments to executive team members holding more than 1% of company stock without formal board review and approval?

• Have you made distributions or compensatory payments to only a portion of investors within the same class?

• Does the entity invest its funds directly in equity of other startups without a professional asset manager?

• Do you distribute tokens to external addresses without KYC documentation?

• Do you hold custody of funds belonging to customers or other third parties, including initial token allocations for the ecosystem?

• Do you have advisory arrangements involving significant equity or cash payments for which you do not receive verifiable documentation detailing the scope and extent of work performed?

• Does the organization have independent directors on the Board?

• Were payments to terminated employees documented and consistent with market norms? Is your capitalization table complete, accurate, and up to date?

• Do you have a process to ensure payments match contracted terms and do not exceed agreed amounts?

• Do you maintain a single register of all approved wallets to which funds may be transferred?

• Do you have a process for withholding taxes on token-based compensation distributed to employees?

• Do you have controls over marketing spending that ensure only agreed charges and justifiable expenses are paid?

• Are there formal communication channels established within the company for communication to the responsible individuals (and, where relevant, to the persons preparing financial statements) of the following matters:

  • Litigation, claims, and assessments

  • Known or alleged instances of financial reporting fraud and/or asset misappropriations

  • Suspected noncompliance with laws and regulations

• Does the organization have a process (ceremony) for generating private keys and controls that provide reasonable assurance that the keys were not revealed to unauthorized parties?

• Does the organization have controls to prevent keys from being lost or erased?

Learn more

This checklist is also available as a Notion template.

If your company is looking for assistance with preparing for a future audit or managing your ongoing audit, reach out.

CONTACT

Email: info@techaccountingpro.com
Link: https://cal.com/andrew-belonogov/30min
Site: https://techaccountingpro.com

Under ASC 710-10-25-9, compensation cost for benefit plans with awards tied to service periods longer than 12 months should be accrued over the service period in a systematic and rational manner. The selected attribution method should be applied consistently and should ensure that:

• Compensation expense is recognized over the requisite service period, which is the period during which an employee must continue providing services to earn the compensation.

• Cumulative compensation cost recognized in each period is at least equal to the cumulative vested portion of the award, meaning the nonforfeitable amount earned to date.

In practice, entities typically apply one of the following accounting policies:

• Award-level straight-line attribution

• Tranche-level accelerated attribution

Each method results in a different cumulative expense recognition pattern. The illustration below compares both methods using a multi-year vesting structure.

Case Study

Scenario

Employees receive cash awards under a compensation plan with the following vesting schedule: 75% in year 2, 20% in year 3, and 5% in year 4, as shown below.

How should the reporting entity recognize the related compensation expense? It depends on the selected accounting policy.

Straight-line Attribution Policy

Under this policy, the full value of the award is recognized on a straight-line basis over the four-year requisite service period. As a result, 25% of the total award is recognized as compensation expense in each year of the four-year vesting period.

The chart below summarizes the financial effects of straight-line attribution by year:

Accelerated Attribution Policy

Under this policy, entities recognize compensation cost separately for each tranche of the award based on its individual vesting date. In the first year, compensation cost is calculated by tranche as follows:

• 50% of the tranche that vests in 2024, which vests 2 years after the award date

• 33% of the tranche that vests in 2025, which vests 3 years after the award date

• 25% of the tranche that vests in 2026, which vests 4 years after the award date

The chart below summarizes the financial effects of accelerated attribution for each year when the expense is recorded:

Straightline vs. Accelerated Attribution

The chart below compares the results of each policy election in the case study above.

You can find the Google Sheet with the calculations here.

For additional discussion of token compensation plans, see the related post below:

If you think this content might be helpful to someone else you know, please share it.

This article examines how different web3 protocol development companies (the “DevCo”) work and answer the following questions:

• How does DevCo create value for its shareholders?

• What sustainable business models are used by different DevCos?

• What impact does a use of different business models have on accounting?

Background

A defining characteristic of most DevCos is the absence of traditional revenue, especially in early stages. The core team initially raises capital privately. That capital is deployed into initial protocol development and ecosystem building. Once the protocol is live and tested, additional funding is typically raised during a token generation event, often through a substantial allocation of tokens to the DevCo’s treasury. Additional capital may come from public token sales or from crypto-focused VCs.

From that point onward, DevCo’s management focuses on growing the ecosystem and maintaining the protocol. Growth is driven by adoption activated through marketing and partnerships, and sustained through transparent protocol governance, support of other builders, and continuous maintenance and development. Growth often translates into appreciation of assets held in the company’s treasury.

Once a network becomes operational, it begins generating real economic value through transaction fees and charges for consumption of protocol utility. However, that value does not accrue to the DevCo directly. It is ecosystem revenue, distributed to validators, operators, delegators, and other participants through protocol mechanisms. Ecosystem revenue reflects protocol value creation, but it does not, by itself, characterize the value of an equity interest in the DevCo.

This helps explain why so many projects appear to operate without traditional revenue for extended periods of time. KuCoin Exchange recently highlighted that 99% of web3 projects sustain themselves primarily through token funding and investor capital rather than operating cash flows. This observation often draws criticism, but from another perspective it reflects a deliberate adoption-first strategy. Teams and investors are underwriting scale and engagement today, with the belief that durable value emerges later. Whether this will play out the same way it did in earlier technology cycles remains uncertain, but the belief itself is understandable.

In practice, DevCos monetize their position through a broader set of cash flow and quasi-cash flow mechanisms than is often modeled. Common sources include:

• Staking rewards

• Initial token allocations

• Token sales and structured unlocks

• Service fees paid by protocol

• Governance-related income

• Commissions from incubated or managed ecosystem projects

• Investment income

• Derivative or hedging arrangements

How these mechanisms translate into sustainable value depends on the underlying business model the DevCo chooses to pursue.

Four sustainability models and their economic logic

Across projects and conversations, four models consistently emerge. Each reflects a different strategic posture and leads to different economic and accounting outcomes.

1) Studio (Diversified Software Development Model)

In this model, the DevCo positions itself primarily as a software development organization. The value creation is driven by engineering services, infrastructure development, and long-term partnerships. Growth comes from scaling these capabilities across ecosystems.

From an accounting perspective, token presales are best understood as financing arrangements rather than operating revenue. Although classification depends on contractual rights and restrictions embedded in the token instruments, sales of tokens from treasury are generally more appropriately treated as non-operating asset sales, separate from core software development services.

Examples: Polygon Labs , Offchain Labs , Consensys

2) Farm (Build-and-Rotate Model)

Here, the DevCo repeatedly initiates new protocols, invests heavily in adoption and engagement, and treats tokens as the primary economic output of its activities, similar to an inventory build-and-monetize cycle.

In this structure, token investors are customers of the DevCo, and the performance obligation is to deliver tokens rather than provide services. Token presales function as prepayments for future token deliveries and may include a significant financing component. Once tokens are live and delivered as part of ordinary activities, token sales can align with operating revenue. However, all facts and circumstances must be evaluated, particularly whether tokens are outputs of ordinary activities or passive treasury assets.

Examples: Mysten Labs

3) Guild (Network Revenue Sharing Model)

In this approach, the DevCo’s value creation is explicitly tied to network outcomes rather than treasury appreciation. The organization participates in ecosystem economics through revenue-sharing mechanisms. This might be implemented as:

• Direct fee distribution, or

• Indirect fee distribution (Token buybacks)

This model creates strong alignment between DevCo value and protocol utility, adoption, and ecosystem growth.

The success of this model depends on the primary driver of value creation which can include:

• Ecosystem customer loyalty,

• Unbeatable technological advantage of the protocol, or

• Price leadership.

From an accounting perspective, both token presales and token sales are generally viewed as financing arrangements representing the sale of future network revenue. Customers are end users of the protocol, and the DevCo’s performance obligation relates to facilitating protocol services through infrastructure management rather than selling tokens as products or acting as a validator or operator.

Whether network income is operating revenue or income from a collaborative arrangement depends on the DevCo’s role and all relevant facts and circumstances.

Examples: Virtuals Protocol , Balancer , Nova Labs

4) Abbey (Endowment Treasury Model)

This model emphasizes long-term mission, governance independence, and sustainability. Core activities are supported by a diversified treasury designed to generate yield sufficient to fund operations and ecosystem development indefinitely.

Here, token presales function as financing arrangements. Token sales from treasury are treated as non-operating asset sales, analogous to portfolio management rather than operating performance. Other yield generated from treasury assets is passive investment income. This structure allows leadership to prioritize long-term network health and mission alignment, even when those choices may be detrimental in the short term. A natural question in this model is whether any income generated can be classified as operating rather than investing in nature.

Examples: Polkadot , Filecoin Labs , Ethereum , Solana Labs

Conclusion

Strategy determines economics, and economics should determine accounting treatment, not the opposite. Attempts to impose a single revenue narrative across fundamentally different models tend to obscure how value is actually created and sustained.

As the industry matures, more efforts are emerging to coordinate the interests of equity holders and token holders within coherent frameworks, making these structures more legible from a governance, funding, and value creation perspective. One such effort is the STAMP framework recently introduced by Colosseum, which will be explored in more detail in a future publication

This article explains how contractual and inherent to an instrument restrictions affect fair value measurement, disclosure requirements, and the assessment of whether crypto assets are readily convertible to cash.

Relevant Considrerations

Fair Value

Before ASU 2022-03, diversity existed in practice regarding whether entities reporting under U.S. GAAP should apply a discount to the price of equity securities subject to a contractual sale restriction. Some preparers adjusted the fair value of securities subject to restrictions to reflect such discounts. In contrast, others considered such a discount inappropriate.

ASU 2022-03 unified practice by clarifying that a contractual restriction on the sale of an equity security is specific to the reporting entity holding the security rather than a characteristic of the security itself. Therefore, the contractual restriction is not considered in measuring the fair value of the equity security. Restrictions that are characteristics of the asset and would be considered by market participants when pricing the asset are reflected in fair value. [FASB ASC 820-10-35-36B, 820-10-55-51 through 55-52A]

Although ASU 2022-03 specifically addresses equity securities, the broader ASC 820 principle regarding restrictions remains relevant to crypto assets. A restriction that is a characteristic of the asset and would transfer with the asset is considered in measuring fair value, while a restriction that applies only to the reporting entity holding the asset generally is not.

In September 2026, FASB issued ASU 2026-03, which creates a narrow exception for investment companies within the scope of ASC 946. Upon adoption, those investment companies are required to reflect contractual sale restrictions when measuring the fair value of equity securities subject to those restrictions. This exception applies to equity securities and does not extend to crypto assets. [ASU 2026-03]

Even though the disclosure requirements introduced by ASU 2022-03 apply to equity securities subject to contractual sale restrictions, similar disclosures are separately required for crypto assets within the scope of ASC 350-60 that are subject to contractual sale restrictions. These disclosures include:

1. The fair value of the crypto assets subject to contractual sale restrictions;

2. The nature and remaining duration of the restrictions; and

3. The circumstances that could cause the restrictions to lapse.

[FASB ASC 350-60-50-6]

For material balances of other digital assets outside the scope of ASC 350-60, entities should evaluate the disclosure requirements applicable to those assets rather than assume that ASC 350-60-50-6 applies.

Readily Convertible to Cash

Contractual sale restrictions are also relevant when evaluating whether an asset is readily convertible to cash.

ASC 815 contains specific guidance for shares of publicly traded stock that will be received upon exercise of a stock purchase warrant. Those shares are not considered readily convertible to cash when both of the following conditions are present:

• The warrant was issued by an entity for its own stock or the stock of a consolidated subsidiary; and

• The shares received upon exercise cannot be sold or transferred for at least 32 days, other than a restriction arising from a pledge of the shares as collateral.

[FASB ASC 815-10-15-131]

However, ASC 815-10-15-132 explicitly prohibits applying this guidance by analogy to other contracts. Thus, the specific 32-day restriction in ASC 815-10-15-131 should not be applied by analogy in determining whether a crypto asset is readily convertible to cash. A crypto asset must instead be evaluated under the general criteria for determining whether an asset is readily convertible to cash.

Accordingly, a contractual sale restriction does not, by itself, prevent a crypto asset from being considered readily convertible to cash based on the specific guidance in ASC 815-10-15-131.

Similarly, the identification of an embedded derivative referencing a crypto asset should not be affected merely by applying the specific 32-day restriction guidance by analogy. However, the applicable requirements of ASC 815 must still be evaluated independently. Initial and subsequent fair value measurement should also consider restrictions that are characteristics of the underlying asset.

Thus, for tokens receivable or payable, a contractual transfer restriction should not affect the identification and recognition of an embedded derivative solely by analogy to ASC 815-10-15-131. However, the initial and subsequent fair value measurement might require an adjustment for restrictions that are characteristics of the underlying tokens.

Practical Implications for Token Fair Value Measurement

When measuring the fair value of token compensation liabilities or tokens receivable, entities should consider restrictions on sale or transfer and reflect those restrictions in fair value when they are characteristics of the asset. This may occur when:

• The lockup feature is embedded directly in the token’s smart contract or code base and applies to the token regardless of who holds it; or

• The token or the applicable right cannot be transferred because of a characteristic that would apply to a market participant acquiring that asset.

Whether a restriction is a characteristic of the asset ultimately depends on whether the restriction would transfer with the asset and would be considered by market participants when pricing it. Generally, these restrictions are considered inherent to the asset based on its unit of account.

In contrast, when otherwise transferable tokens are locked in a separate smart contract as a result of an arrangement entered into by the holder, the restriction generally is specific to that holder rather than inherent to the underlying token. Hence, entities need NOT account for such restrictions when measuring the fair value of tokens receivable or payable.

Further, when measuring the fair value of token compensation liabilities, entities should not adjust the fair value of the underlying token merely for vesting or lockup provisions that are specific to an individual award, unless those provisions are characteristics of the asset being measured.

Conclusion

A clear distinction must be made between restrictions that are inherent to the digital assets themselves (that is, technological restrictions) and contractual restrictions that apply only to an individual entity (that is, legal restrictions). Only restrictions inherent to the asset’s unit of account affect its fair value. Contractual restrictions do not affect fair value, nor do they prevent crypto assets from being considered readily convertible to cash.

Update note (September 30, 2026). For investment companies within the scope of ASC 946, ASU 2026-03 creates a separate exception for equity securities subject to contractual sale restrictions but not for crypto assets.

Acquihiring is a common strategy used by companies seeking access to highly skilled talent, particularly in the tech space. An acquihiring transaction is a transaction in which an acquirer obtains control of a target company primarily to gain access to its workforce rather than its products, customers, or processes. These transactions are most common in technology and other knowledge-intensive industries where highly specialized teams are difficult to recruit organically.

In most acqui-hiring transactions, the acquired entity ceases operations shortly after the acquisition date. Employees are integrated into the acquirer’s organization, and the target’s products and services are discontinued, absorbed, or deprioritized. The principal strategic benefit is the ability to acquire a fully formed, highly specialized team within a compressed timeframe.

Although the transaction value is typically driven primarily by the acquisition of human capital, current guidance frequently results in these transactions being accounted for as business combinations, with workforce-related value subsumed into goodwill and prohibited from separate recognition.

This paper explains the economic characteristics of acqui-hiring, outlines the applicable accounting framework, and highlights structural tensions in how existing guidance captures these transactions. It also discusses common structuring variations, including reverse acqui-hiring, and identifies areas where accounting outcomes may be driven more by technical form than by economic substance.

Economic Substance of an Acqui-hiring Transaction

From an economic perspective, the consideration transferred in an acqui-hiring transaction is paid primarily for the following components:

• Contractual workforce-related rights, such as employment agreements, retention arrangements, and non-compete clauses

• Non-contractual workforce-related value associated with an assembled team and its collective expertise

• Intellectual property, including developed technology, in-process research and development, or internal-use software

Any existing business processes are often incidental to the transaction and are not expected to continue in their pre-acquisition form.

Applicable Accounting Models

Under US GAAP, an acqui-hiring transaction must be accounted for using one of two models:

• The acquisition method for business combinations

• The cost accumulation model for asset acquisitions

The determination of the applicable model is governed by whether the acquired set meets the definition of a business under ASC 805. The accounting framework does not provide a separate model for transactions primarily motivated by workforce acquisition. As a result, acqui-hiring transactions are forced into one of these two existing models.

Determining Whether an Acqui-hire Is a Business

Under FASB ASC 805, Business Combinations, the buyer should determine whether features of the acquired set indicate that a new business needs to be integrated with the acquirer’s existing business. This determination is based on the two-step process designed to assess whether the FASB’s formal definition of a business in ASC 805-10-55-3A through 805-10-55-9 has been met in the context of a set.

Step 1: Concentration of Fair Value Test.

The first step evaluates whether substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If this test is met, the acquired set is not a business.

In acqui-hiring transactions, a significant portion of the transaction value is often concentrated in the assembled workforce. However, because an assembled workforce is not an identifiable asset for purposes of ASC 805, it is excluded from the concentration test. As a result, transactions in which workforce-related value clearly dominates the economics may nonetheless fail the concentration test.

Step 2: Business Definition (Inputs and Processes) Test.

If the concentration test is not met, the acquirer must assess whether the acquired set includes both inputs and substantive processes that together have the ability to create outputs.

“A business is an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants.”

[FASB ASC 805-10-55-3A]

While a workforce alone does not constitute a substantive process, in practice, the combination of a workforce and intellectual property often leads to the conclusion that a substantive process exists. In acqui-hiring transactions, however, these processes are frequently economically insignificant and are not expected to generate outputs independently post-acquisition.

Accounting Outcomes

Under both models, an acquirer typically recognizes additional assets that are not present on the balance sheet of the target. This is because the transaction provides evidence that internally generated intangible assets of the target do actually exist and has external value supported by empirical evidence.

Accounting standards require accounting to reflect the financial position and changes thereto from the perspective of a general user of financial statements. From the perspective of this general user, the nature of the set acquired, rather than its intended purpose, determines the transaction accounting treatment.

For the same reason, the fair value of individual assets (which is important for both types of transactions) is determined based on market participant assumptions, hence, specific buyer’s intentions regarding the use or abandonement of an asset do not change the fair value measurement, because other market participants might be willing to pay for the asset.

Business Combination Accounting

In a business combination, the acquired set is a business, and a business is more than just a sum of its individual parts. Thus, identifiable assets and liabilities are recognized at fair value as of the acquisition date, and any excess of the consideration transferred over the fair value of identifiable net assets is recognized as goodwill.

Goodwill arises because the transaction price is negotiated for a going concern. Economically, goodwill represents the present value of expected abnormal returns that exceed the normal return on identifiable net assets. These returns only exist because the assets are already organized into a functioning business.

Transaction costs are expensed as incurred because capitalization as part of cost of identifiable assets would result in a cost basis different than the fair value of individual assets

Asset Acquisition Accounting

In an asset acquisition, the acquired set is not a business. Therefore, the set is just the sum of individual assets and liabilities acquired, and nothing more than that. Hence, standard cost accumulation model is followed where we assign total cost (including liabilities assumed and transaction costs) of transaction to all assets acquired. based on their relative fair values. No goodwill is recognized.

Assembled Workforce Accounting

Business Combinations

ASC 805 prohibits the separate recognition of an assembled workforce in a business combination [ASC 805-20-55-6]. An assembled workforce does not meet the definition of an identifiable intangible asset because it is not separable and does not arise from contractual or legal rights.

As a result, its value cannot be measured separately from the overall business and is instead included in goodwill.

The accounting framework intentionally treats assembled workforce differently from other intangibles in a business combination. Goodwill represents the residual value of the acquired business after identifiable assets and liabilities are recognized, and the value attributable to an assembled workforce is included in that residual.

Two examples of acquihiring transactions accounted for as business combinations:

• Glu Mobile, Inc. acquired Dairy Free Games, Inc., a small mobile game studio, for $2m cash as discussed in the filing available here. The deal was treated as a business combination. Identified intangibles included in-process R&D for the game under development. About $0.6 million was recorded as goodwill attributable primarily to synergies and assembled workforce.

• Acquisition of MediaCrossing, Inc. by Kubient that was explicitly identified as the acqui-hire in the buyer’s Form 10-K. Although the legal form was an Asset Purchase Agreement (available here), Kubient concluded that the acquired set constituted a business and a deal was accounted for as a business combination. The goodwill was attributed primarily to business reputation, assembled workforce, and anticipated synergies.

Asset Acquisitions

In an asset acquisition, an assembled workforce may be recognized as an identifiable intangible asset because the transaction price provides observable evidence of value. The assembled workforce is measured by allocating transaction price among assets acquired based on their standalone fair values. The standalone fair value of the assembled workforce is typically determined using a replacement cost method. The allocated cumulative costs assigned to the assembled workforce are amortized over expected useful lives.

An example of acquihiring transaction accounted for as an asset acquisition can be found in Form 10-K of Maximus, Inc. Maximus reports that on February 14, 2024, it acquired part of an IT vendor that had been providing services to the company. Cash consideration was 18.0 million dollars. Maximus states that almost all of the consideration ($17.9m) was allocated directly to the most significant asset, the assembled workforce, which was recognized as an intangible asset and amortized over eight years.

How to Appropriately Account for Employee Payments and Other Transactions Separate from Acquihiring?

Careful evaluation is required to distinguish consideration transferred for the acquired business or assets from payments related to separate transactions, including compensation for post-acquisition services.

Amounts attributable to pre-acquisition services required to consummate the transaction are included in the purchase price.

Amounts attributable to post-acquisition services1, retention arrangements, or continued employment are recognized as compensation expense in the post-acquisition financial statements. We should also note that if the legal documentation of the deal specifies that a portion of contingent consideration paid is linked to the permanence of the seller acting in its capacity as an employee of the combined entity, this portion should be excluded from the transaction price and accounted for as compensation.

In acqui-hiring transactions, interdependencies between transaction consideration and compensation arrangements can complicate this analysis, particularly in reverse acquihiring transactions.

EXAMPLES

Payments treated as a part of the transaction price:

• Payments required to consummate the transaction

• Replacement awards attributable to pre-transaction service

• Earnouts contingent on acquired business performance or nonemployee conditions

• Severance payments to terminated employees

• Replacement of existing stock awards based on the law or pre-existing obligations

• Stock options vested upon a change in control.

Payments treated as compensation expense:

• Fees paid under the transition service agreements (in acquihiring such agreements are less common and typically narrower in scope than in traditional acquisitions)

• Replacement awards attributable to post-transaction service

• Voluntary replacement of existing stock awards that expire upon a change in control

• Excess of the fair value of the replacement awards over the fair value of the acquiree’s award for which employees have rendered the required services as of the acquisition date

• Earnouts contingent on continued employment or retention metrics

What is Reverse Acquihiring?

In addition, there is also what is generally known as “reverse acquihiring”. In a reverse acqui-hiring structure, the acquirer does not acquire the target entity. Instead, it licenses technology or intellectual property and hires employees directly through individual employment agreements.

The target entity may be dissolved or continue to exist, but with limited ongoing operations. For the acquiree, this transaction is not a liquidity event; however, payments for the licensing of existing technology are intended to provide fair compensation to existing investors (and employees who do not receive an employment offer).

These arrangements are generally accounted for as multiple separate transactions rather than as a business combination. No assembled workforce or goodwill is recognized. Payments for employment are treated as compensation, and licensing arrangements are accounted for under the applicable guidance for intangible assets.

Great examples of reverse acquihiring deals were discussed in the following Substack post:

Stack Trace

The Rise of Reverse Acquihires

Last week, Google paid Windsurf $2.4 billion. Not to buy the company, but to license its technology and hire the founders plus their core team. Within days, most Windsurf employees found themselves stranded at a leaderless company until Cognition swooped in with an acquisition…

Read more

a year ago · 2 likes · 1 comment · Jack Arenas

What Features of Acquihiring are not Reflected in Existing Accounting Models?

Overall, asset acquisition accounting is suited for a deal with no expectation of integrating the new business into the existing business. On the other hand, a business combination is suited to a deal where integration is expected (or at the very least possible). However, the economic features of an acquihiring deal do not always align with this view. In particular:

1. The mere presence of an assembled workforce is traditionally viewed as an indicator that the acquired set includes a substantive process, hence, meets the definition of a business. Yet, an acquihiring transaction is distinct from other acquisitions specifically because the target’s substantive processes (if any) are typically considered insignificant and even irrelevant to the deal motivation and the transaction price calculation. If the acquired set does not include an economically meaningful component related to such a process, it might be argued that the transaction does not involve a business combination and should instead be treated as an asset acquisition in the general case.

2. In an acquihiring transaction, the transaction value is often concentrated primarily in an assembled workforce. This effectively provides additional assurance regarding the value of the assembled workforce acquired, similar to that in an asset acquisition (which is the underlying rationale for recognizing assembled workforce intangibles in an asset acquisition but not in a business combination transaction).

3. The differentiation between accounting for a business combination and an asset acquisition is often driven by where the transaction value is concentrated. However, because ASC 805-20-55-6 does not permit separate recognition of the assembled workforce in a business combination, the screen test does not consider the concentration of value in this asset in determining whether the transaction should be treated as an asset acquisition or a business combination.

4. However, under the existing guidance, the acquisition strategy increases the likelihood that a transaction will be classified as a business combination and that the value of the assembled workforce will be assigned to goodwill.

5. Additionally, normally, employee compensation arrangements are accounted for separately from transactions. However, in acquihiring, interdependencies might exist between the transaction price and compensation, which may not be resolvable using traditional accounting methods. This is particularly true for reverse acquihiring, where employment and licensing arrangements are recognized on a per-contract basis.

Conclusion

Although existing guidance provides a reasonably practical framework, its application to acqui-hiring transactions can produce results that emphasize technical form over economic substance.

As acqui-hiring continues to be a common transaction strategy, careful judgment and robust documentation are required to ensure that accounting conclusions appropriately reflect the nature of the acquired set and the drivers of transaction value. If your team is involved in an acqui-hiring transaction, please reach out to share your experience and observations.

Frequently Asked Questions About Acqui Hire Accounting

If the startup has no customers or revenue, can it still be a business?

It depends. An acquired set does not need to have revenue or customers to meet the definition of a business, provided it includes inputs and substantive processes capable of producing outputs, an organized workforce, and an input that it can develop and convert into an output.

Does the presence of employees automatically mean the set is a business?

No. A workforce alone does not constitute a substantive process under ASC 805. While employees are often essential to operations, their mere presence does not demonstrate the existence of an organized process capable of producing outputs. To qualify as a business, there must be evidence of structured activities, workflows, or operating systems that extend beyond individual employee skills.

Can we record an assembled workforce intangible even if the purchase agreement does not mention it?

Yes. In an asset acquisition, recognition is based on the substance of the acquired asset rather than the contractual labels used. If the acquired set includes an assembled workforce and that workforce has measurable value, it may be recognized as an intangible asset, even if it is not explicitly named in the purchase agreement. The existence of an arm’s-length transaction provides evidence of value, and the asset is measured based on relative fair value.

Do the accounting treatment of transaction costs differ between business combinations and asset acquisitions?

Yes. In a business combination, transaction costs are expensed as incurred and are not included in the purchase price. In contrast, in an asset acquisition, transaction costs are capitalized into the cost of the acquired assets.

How do companies account for non-compete clauses acquired in acqui-hiring transactions?

A non-compete agreement is a contractual right that restricts an individual or entity from engaging in specified competitive activities for a defined period and geographic area. When obtained in connection with an acqui-hiring transaction, a non-compete may represent an identifiable intangible asset if it arises from contractual or legal rights.

In acqui-hiring arrangements, non-compete clauses are often included to limit founders' or key employees' ability to compete with the acquirer after the transaction. From an accounting perspective, the presence of a non-compete does not, by itself, determine the accounting treatment; rather, the analysis focuses on whether the agreement represents an identifiable intangible asset and has measurable economic value.

If a non-compete meets the definition of an identifiable intangible asset, it is recognized regardless of whether the transaction is treated as a business combination or an asset acquisition. The difference lies in measurement. In a business combination, the non-compete is measured at fair value as of the acquisition date, with any residual consideration recorded as goodwill. In an asset acquisition, the total consideration is allocated to the acquired assets based on relative fair values, and no goodwill is recognized.

In practice, non-compete clauses in acqui-hiring transactions are often not separately recognized. This is because their economic value is frequently limited or highly subjective, particularly when enforceability is uncertain. Valuation depends heavily on factors such as legal enforceability, geographic and temporal scope, and the likelihood that the restriction would meaningfully prevent competitive behavior.

Recent legal developments further affect this analysis. Although the Federal Trade Commission issued a 2024 rule proposing a broad ban on non-compete agreements, it was subsequently vacated and is not in effect. As a result, enforceability remains governed by state law, many of which significantly restrict or prohibit non-competes for certain categories of workers. These limitations often reduce or eliminate the practical value of non-compete agreements.

Accordingly, while non-compete clauses may meet the technical criteria for recognition as intangible assets, they are frequently concluded to have little or no separately measurable value in acqui-hiring transactions. Where recognized, their valuation requires significant judgment and is highly sensitive to assumptions regarding enforceability, scope, and duration.