The writer is the editor of The Dig and an assistant professor in the MBA program at American University.
Despite the growing use of digital assets, there is still a big hole in accounting rules about what to do when companies own them. Investors deserve more clarity on these extremely volatile bets.
Neither US nor international accounting rules specifically mention digital assets like bitcoin or stablecoins. The only advice comes in the form of non-binding accounting guidelines from the American Institute of Certified Professional Accountants and similar guidance in June 2019 from Heads of International Financial Reporting Standards.
The organizations’ guidelines are open to interpretation, but both suggest that crypto investments should be accounted for as intangible assets. Adjustments to their values are made only for price drops. No interim upward adjustment to reflect capital gains is permitted until the assets are sold.
These guidelines, however, still leave listed companies holding volatile crypto assets plenty of leeway regarding what they tell investors in presentations and press releases that supplement the required filings. These choices will shape the market narrative regarding companies’ crypto strategies.
Take the case of software company Microstrategy, which claims to be the largest publicly traded bitcoin holder in the world, holding some 125,000 of them. At current market rates, that’s worth about $5 billion.
Microstrategy’s presentation of its bitcoin holdings to investors caught the attention of the U.S. Securities and Exchange Commission, which wrote to the company on October 7, questioning its approach.
The company published statutory accounts in accordance with rules known as “generally accepted accounting principles” and disclosed write-downs on the value of its holdings. In its fourth quarter result, it announced a $146.6 million writedown in bitcoin.
However, Microstrategy had also previously presented non-GAAP profit and loss figures in earnings press releases that excluded writedowns on its bitcoin holdings. These alternative metrics can be misleading because they redirect investors to numbers that tell an incomplete story about company results.
Microstrategy argued in its response to the SEC that some investors “might not view bitcoin’s non-monetary impairments as valuable information without equal consideration of subsequent increases in market value.” Even though he maintains that buying bitcoin is part of his ordinary business operations, he said the writedowns on the cryptocurrency “could otherwise distract” from investors’ analysis of his business. software analysis.
However, the SEC later ruled that it opposed Microstrategy’s approach. The warning was large enough to trigger a 20% plunge in the company’s stock price after the SEC’s January 20 letter was released.
The SEC could eventually stop the use of non-GAAP adjustments for the profits of every holder of crypto assets. Some may stop on their own to avoid a letter from the SEC. But in the absence of clear rules, companies with crypto assets have decided on different accounting approaches.
In recent results, Tesla has incorporated the negative impact of a recent impairment along with other items in the accounts. But Coinbase and Square have reported writedowns more explicitly in the past on crypto assets.
Coinbase also had to make an accounting decision on its holdings of some $92 million in digital currency USD Coin, a so-called stablecoin that is backed by dollars or equivalent and has a value close to US currency. As such, it classifies USDC as current assets, a balance sheet category for holdings that are highly liquid, such as cash, or can be sold for cash within a year. It treats the value of its USDC holdings as if it were a financial instrument. This means they are valued at amortized cost – where the value is depreciated over time.
This approach is similar to how data analytics group Palantir treats the gold it bought as doomsday cover. The group announced last August that it would buy $50 million worth of 100-ounce gold bars. Palantir initially recorded gold at cost and expects to revalue it at the lower of cost or fair market value each period.
Trickier accounting challenges may be ahead. Take the hot market of NFTs, or the art of non-fungible tokens, for example. How should companies record NFTs in their accounts? David Larsen, alternative asset specialist at Kroll, told me that there is still very little secondary market for NFTs. So how are companies going to put a Bored Ape NFT on the balance sheet?