The risk of bitcoin on a public company’s balance sheet

The risk of bitcoin on a public company’s balance sheet
The risk of bitcoin on a public company’s balance sheet

Most listed companies can only realize loss on crypto assets under US accounting rules today. Profits only count if they sell.

Why it’s important: Fifteen publicly traded companies have more than 1,000 bitcoins on their balance sheets (over $20 million worth), according to Bitcoin Treasuries.

  • During the 2021 boom times, many public companies entered bitcoin. Some of them said it was a hedge against inflation. Others were probably just hoping that they could record an easy victory for a quarter of an hour.
  • Under US generally accepted accounting principles (US GAAP), as it is interpreted todaycan the price of bitcoin only go down, at least for most public companies.

In the weeds: There is actually no US GAAP rule for bitcoin and cryptocurrencies – not yet. The practice is based on an interpretation of existing rules.

“It was a view that you had to take a conservative stance, therefore you had to see it as an intangible asset, says Markus Veith, who heads the digital asset practice at Grant Thornton, one of the country’s largest tax advisory and accounting firms, to Axios in an interview. .

  • Intangible assets are things like software, intellectual property or patents.
  • Such assets can be valuable, but they are difficult to price because they are rarely traded. “Superman” is intellectual property, and he is undoubtedly valuable, but he doesn’t go on the market much (in fact, never).
  • So the practice is to account for them at the price a company paid for them.

The intrigue: Bitcoin is intangible, but it is traded 24/7.

  • – Plain and simple, as a public company you have to measure the decline in value. The cost is going down, it is not going up, explains Veith.
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Of the note: Public companies can only realize a gain from their cryptocurrency holdings by selling (although there is an exception for investment companies).

Zoom out: This means that companies like Tesla or Block, Inc (Square) realize losses on the bitcoin they bought in good times.

Yes, but: It’s not like that everywhere. Under International Financial Reporting Standards (IFRS), companies can mark digital assets to market. IFRS is used in Canada and Europe and many other places, just not the biggest crypto market on earth: the US

  • We discussed this with publicly traded bitcoin miner Hut8 recently. As a Canadian company, it updates the value of its bitcoin holdings based on the market every quarter.

What we’re looking at: The directive for public companies to treat cryptocurrency as an intangible asset comes from the US Securities and Exchange Commission, which relies on the standard-setting body Financial Accounting Standards Board (FASB).

  • The FASB has a project underway now to update how it treats digital assets.
  • “If the FASB comes out with guidance that says you can mark to market, the SEC will say yes,” Veith said. “Your word is gold.”

Bottom line: So if holding bitcoin can only put a US public company at a loss, why would anyone buy bitcoin before US GAAP changes?

  • “There’s an old saying: Don’t let bad accounting get in the way of a good investment decision,” Veith said.

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