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The writer is editor of The Dig and adjunct professor in the MBA programme at American University
Despite the rising use of digital assets, there is still a big hole in accounting rules about what to do when companies hold them. Investors deserve more clarity on these hugely 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 guidance from the American Institute of Certified Professional Accountants and similar direction in June 2019 from the setters of the International Financial Reporting Standards.
The guidance from the organisations is subject to interpretation but both suggest crypto investments should be accounted for as intangible assets. Adjustments to their values are made only for price declines. No interim upward adjustments to reflect value gains are allowed until the assets are sold.
That guidance, however, still leaves listed companies holding volatile crypto assets plenty of room to manoeuvre regarding what they tell investors in presentations and press releases that supplement 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 world’s largest publicly traded holder of bitcoins, holding some 125,000 of them. At current markets rates, that is worth around $5bn.
Microstrategy’s presentation of its bitcoin holdings to investors drew scrutiny from the US Securities and Exchange Commission which wrote to the company on October 7, questioning its approach.
The company has reported statutory accounts under rules known as “generally accepted accounting principles” and disclosed impairments on the value of its holdings. In its fourth-quarter result, it reported a bitcoin writedown of $146.6mn.
However, Microstrategy had also previously presented non-GAAP profit and loss figures in earnings press releases that excluded impairments on its bitcoin holdings. Such alternative metrics can be misleading because they redirect investors to figures that tell an incomplete story about the company’s results.
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Microstrategy argued in its response to the SEC that some investors “may not consider bitcoin non-cash impairment losses to be valuable information without equal consideration of subsequent increases in market value”. Even though it contends that buying bitcoin is part of its ordinary business operations, it said impairment losses on the cryptocurrency “may otherwise distract” from investor analysis of its software analytics business.
However, the SEC subsequently ruled that it objected to Microstrategy’s approach. The admonition was material enough to trigger a 20 per cent fall in the company’s share price after the SEC letter was disclosed on January 20.
The SEC may eventually stop the use of non-GAAP adjustments for earnings for every crypto asset holder. Some may stop on their own to avoid an SEC letter. But in the absence of clear rules, companies with crypto assets have decided on varying accounting approaches.
In recent results, Tesla bundled in the negative impact of a recent impairment with other items in accounts. But Coinbase and Square have reported impairments more explicitly in the past on crypto assets.
Coinbase also had to make an accounting decision on its holdings of some $92mn in digital currency USD Coin, a so-called stablecoin which is backed by dollars or equivalent and has a value close to the US currency. As such, it classifies USDCs as current assets, a balance sheet category for holdings that are very liquid, such as cash, or can be sold for cash within a year. It treats the value of its USDC holdings like it would a financial instrument. This means they are valued at cost that is amortised — where the value is written down over time.
That approach is similar to how data analytics group Palantir treats the gold it has bought as a doomsday hedge. The group announced last August it would purchase $50mn in 100-ounce gold bars. Palantir initially recorded the gold at cost and plans to remeasure it at lower of cost or fair market value each period.
Trickier accounting challenges might be coming. Take the hot market for NFTs, or non-fungible token art, for example. How should companies record NFTs in their accounts? David Larsen, an alternative asset specialist at Kroll, told me there is still very little secondary market for NFTs. So how will companies put a Bored Ape NFT on the balance sheet?