Bitcoin’s (BTC-USD) arrival into the mainstream has seen companies like Microstrategy (MSTR), Block (SQ) and Tesla (TSLA) add the digital coin to their balance sheets — and spawned a new class of investors drawing all or part of their salaries in cryptocurrency.
But with Bitcoin slumping by nearly half since hitting a November high under $69,000 in the midst of crypto’s grim winter, the strategy is not without risk — especially for companies bound by strict corporate accounting rules that some argue are in need of updating.
It can also put pressure on the results of firms with crypto on their balance sheets, like Microstrategy — a business intelligence firm turned publicly-traded Bitcoin whale, and make accounting more difficult.
Although crypto is back on the rise, for now at least, some observers argue the whipsawing and accounting rules can make valuing cryptocurrencies more onerous for companies and investors, and may dissuade other firms from getting direct exposure to crypto.
“You can only mark [Bitcoin] down, you can never mark it up, and in truth I’d be better off, from an accounting point of view, to buy a stack of comic books or baseball cards,” Microstrategy CEO Michael Saylor told Yahoo Finance last week.
Based on Generally Accepted Accounting Rules (GAAP) and Securities and Exchanges Commission guidance, digital assets must be recorded as indefinite intangible assets. That means they must be marked down for impairment losses but cannot be marked up for value gains, until the asset is sold.
Given crypto volatility, there can be wide swings between the carrying value of Bitcoin and its market value for the same period. For Microstrategy, that equated to a whopping $1.6 billion difference in June, according to the company, which has only gotten worse.
As of this week, Microstrategy owns a total of 125,000 Bitcoins, In the company’s fourth quarter earnings, $110.5 million in gross profit got wiped out by a $147 million impairment loss from holding BTC. Given Bitcoin’s rough start to 2022, the next quarter isn’t expected to look much better.
But while it reported a carrying value of $2.85 billion in BTC for the last period, its same bitcoin holdings were worth $5.7 billion at market value.
A battle brews over accounting rules
Arcane accounting rules are far from the only reason why corporates holding crypto haven’t had a great couple of months. Yet the policy is a barrier to more firms dipping into digital coin.
Industry participants have recognized the problem. Between the summer and early fall, the Financial Accounting Standards Board (FASB) – the standard setting body for corporate accounting and GAAP guardian, received hundreds of letters from companies — including Microstrategy and Coinbase (COIN) — asking the organization to consider revising its accounting rules for digital assets.
Robert Sledge, a partner with the accounting firm KPMG who specializes in auditing and other financial services for crypto-focused companies, is among those in favor of a revising the accounting rule. In an interview with Yahoo Finance last fall, Sledge pointed to a letter KPMG filed about the rule, explaining that the current accounting standard may hide important financial information about a company’s value.
Sledge suggested that the most “meaningful change” FASB could quickly implement would be to permit digital assets with a readily determinable fair value (market price) to be measured by their fair value. At a later point, FASB could also address broader issues around whether fair value should be applied more widely to certain types of assets and business models.
The organization’s decision about whether to change Bitcoin accounting rules is expected to be a slow moving process. For instance, BTC is considered a commodity in the U.S., and changing its accounting rules may potentially change how other certain commodities, such as gold, are recorded.
“Historically, these projects take months to years sometimes,” Sledge added.
On December 15, the FASB added a digital asset project to its research agenda that explores accounting and disclosure of exchange traded digital assets and commodities. In the coming months, it will discuss the research project at a public meeting on a date not yet determined, according to a FASB spokesperson.
“Clearly it would be better if there were fair value accounting for a publicly traded company. If we ever see a transition from indefinite intangible to fair value accounting, that would be a catalyst for more corporate adoption of Bitcoin,” Microstrategy’s Saylor added.
