Fair Value Measurement in Inactive Crypto Asset Markets

Abstract

This article proposes a new dynamic method, the Principal Path Method (PPM), for pricing crypto asset against a primary or functional (fiat) currency in situations where these assets do not trade directly against the functional currency or trade at volumes that prevent resulting pricing information to qualify as Level 1 (ASC 820) for financial reporting. We base our method on the guidance provided in ASC 820, IFRS 13, and IAS 21. Our method is designed to extract prices from “compliant” markets that result in reliable inputs to the valuation process. We believe that our methodology improves the current techniques used to value thinly traded crypto assets such as using the last observable transaction price, creating a weighted-average price across multiple markets, or using data on comparable tokens, if available. Furthermore, we present empirical evidence that suggests pricing information generated by our method for non-exchangeable, thinly traded, or illiquid crypto assets better reflects the fundamental qualitative characteristics of useful information, relevance and faithful representation, and results in more reliable inputs used in the valuation process. Unlike methods currently used in practice, our method ensures the integrity of the valuation data employed by selecting prices from compliant markets.

Exploring the uncharted territories: a structured literature review on cryptocurrency accounting and auditing

“…In addition, Beigman et al. (2021) introduced a method to identify the primary market for fair value measurement as per IFRS 13, and Beigman et al. (2023) presented a method for fair value measurement in inactive markets, aligning with IFRS 13, IAS 21 and ASC 820.…”

“…Morozova et al, 2020). Within the (D3) category, three studies (Beigman et al, 2021(Beigman et al, , 2023Ram et al, 2016) utilizing a mixed methodology were incorporated and classified as "other empirical. "…”

“…The revaluation model can be used only in the presence of an active market for the cryptocurrency (Chou et al, 2022;Ramassa and Leoni, 2022), however, not all cryptocurrencies have an active market, case in which the cost model will be applied (Fomina et al, 2019). In addition, Beigman et al (2021) introduced a method to identify the primary market for fair value measurement as per IFRS 13, and Beigman et al (2023) presented a method for fair value measurement in inactive markets, aligning with IFRS 13, IAS 21 and ASC 820.…”