Microstrategy & the SEC: GAAP accounting challenges for corporates with crypto
If you prefer listening, check out our feature in the Decrypt Daily below. Jump to the 8:00 minute mark for the section about Microstrategy and GAAP accounting standards.
Over 7% of Bitcoin ($48 Billion) is held by corporations and institutions. (Source: Bitcoin Treasuries). Furthermore, 60% of US institutional investors intend to increase their exposure to digital assets. This number stands at 80%, for corporations and institutions surveyed in Asia. (Fidelity Institutional Investor Study)
Globally, companies (public and private) are choosing to hold crypto in their corporate treasuries. Many view their Bitcoin holdings as a hedge against inflation.
Microstrategy, the SEC, and GAAP accounting
The rejection of MicroStrategy's accounting makes clear that the U.S. Securities and Exchange Commission (SEC) is determined to enforce GAAP as the designated accounting standard for publicly traded companies. This is ultimately in the pursuit of ensuring that investors have appropriate financial information at their disposal. However, GAAP standards fail to accurately represent the financial status of corporations with long-term crypto treasury strategies.
Established in 1973, the Financial Accounting Standards Board (FASB) is the premier source for accounting and reporting standards for public, private and not-for-profit organizations, following the General Accepted Accounting Principles (GAAP). The U.S.Securities and Exchange Commission (SEC) recognizes the FASB as the designated accounting standards setter - which basically just means that what the FASB says - along with what is agreed upon in the GAAP - goes.
In theory, investors and shareholders ought to be able to look at any company's GAAP balance sheet and P&L determine, how much capital the business has, and make a judgment as to whether the business is 'well run'.
The challenge with GAAP in the context of Microstrategy, or any company with a long-term crypto treasury strategy is that it requires businesses to record unrealized losses for intangible assets as 'impairments'. This means that if the price of the crypto asset value dips during the financial reporting term-end, the business has to report that impairment as an operating loss on their P&L.
Companies with long-term crypto treasury strategies have to report losses in their short-term financial reports even if they have no intention of realizing the loss. Unrealized gains on the other hand are ignored and businesses can’t adjust the value of the asset upward. The gains can only be reported when realized.
This asymmetrical accounting treatment is a challenge for businesses that hold crypto in their treasury.
It is understandable that businesses would need to unofficially communicate their crypto treasury strategy to their investors otherwise they may be misled by the GAAP income statement to believe the company's operating business has taken a hit.
Updating GAAP standards for the digital economy
Over the past year, the FASB has been flooded with letters and emails from a multitude of stakeholders, including a September letter issued by the Chamber of Digital Commerce urging the board “to add standard setting for digital assets/cryptocurrency on the near-term agenda.” The letter continued, "for investors, corporates, and professional service providers such as accountants and auditors, cryptocurrencies and digital assets are now part of the daily business" and that "effectively all relevant constituents involved in the digital asset economy today note that the lack of GAAP clarity for digital assets is an identifiable need to facilitate better investor information, improved company accounting and financial governance, as well as consistent third-party CPA service to market participants."
Despite increased calls for clarity, the FASB chairman Richard Jones said in November that beyond gathering intel about current issues surrounding standard setting for cryptocurrencies, nothing else is in the works, according to CFO Dive. Therefore, it may be some time before these standards are updated to become more crypto-friendly.
This adds an accounting hurdle for US businesses (especially publicly traded companies), as global corporate adoption soars.
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