Current accounting guidelines provide virtually no upside for companies with bitcoin on their balance sheet — but this could change.
This is an opinion editorial by Matt Maraia, a CPA looking to help educate the Bitcoin community on the ever-changing regulations on accounting standards.
As the evolving digital assets ecosystem continues to pose more questions than answers within the accounting sector, members of the Financial Accounting Standards Board (“FASB”) delivered some groundbreaking news. On May 11, 2022, the FASB voted in favor of holding future discussions on the current dilemma presented by corporate cryptocurrency investments, signaling a potential overhaul to current accounting guidance on digital assets.
This action was spawned by recent developments of corporate willingness to put cryptocurrencies, primarily bitcoin, on their balance sheet. Most notably, publicly traded behemoth MicroStrategy (NASDAQ: MSTR), which holds a $2.7 billion market cap, purchased upwards of $250 million worth of bitcoin in late 2020 and more than doubled down on that position throughout 2021 and 2022. Others have since followed the same trend and have been directed by many governing boards and auditors alike to account for their newfound, yet continuously volatile assets under the scope of Accounting Standards Codification (“ASC”) Section 350. An uncertainty immediately followed as organizations contemplated whether accounting for purchased digital assets under the umbrella of indefinite-lived intangibles guidance appropriately valued this emerging asset class.
Companies were — and still are — encouraged to account for these holdings under ASC 350 at their cost basis, subject to impairment, all the while neglecting subsequent increases in fair value. Put simply, organizations were guided to account for these assets at their purchase price on the balance sheet while only a decrease in value below the initial cost of the holdings were to be recognized as a loss on the income statement! Perversely, increases in price and value were to be ignored on both the balance sheet and income statement. No wonder public corporations are hesitant to touch bitcoin or digital assets. This issue continues to persist, but a possible key shift in accounting treatment may be in process subject to FASB vote.
Agreed-upon discussions will begin to question the existing methods of recognition, measurement, presentation and disclosure. Many hope that this leads to the application of ASC 820, alluding to fair-value measurement guidance as a more pertinent alternative to ASC 350. It remains unclear as to exactly how ASC 820 will impact accounting for digital asset holdings. However, the general concept posits that an appreciation in price would be accounted for on the balance sheet at current market value based on the date of the relevant financial statement reporting period. Furthermore, companies would begin to see benefits on their income statement when an increase in the price of their holdings exceeds the purchase price, representing a gain (increase in net income).
Over the course of the calendar year, we watched bitcoin, the most valuable digital asset in the ecosystem, plummet from approximately $47,000 per token on January 1, 2022 to under $20,000 per token on June 30, 2022, for a 56% decrease over that period. Given the highly volatile market with which bitcoin operates, does the current method of accounting provide an accurate picture of a company’s balance sheet? Does the current guidance arm investors with the proper tools to make smart purchasing decisions? These are the questions the FASB seeks to resolve.
Stay tuned - change is inevitable. Institutional adoption of digital assets may be much closer than it appears.
This is a guest post by Matt Maraia. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc. or Bitcoin Magazine.
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