Bitcoin lover, scream bad!
Accounting firms restrict companies from holding cryptocurrency as assets, even if they are venture capital firms – like SoftBank Group Corp. – Leave a free hand to invest in unicorns that are just as risky and volatile. MicroStrategy Inc. and Elon Musks Tesla Inc. own Bitcoin, but they are exceptions. A survey found that only 5% of finance managers plan to invest in Bitcoin this year.
This mindset stands in the way of wider adoption of Bitcoin and other cryptocurrencies because companies holding such digital currencies face an accounting risk: large asset write-downs.
This happens despite the fact that generally accepted accounting principles (GAAP) do not have any official guidelines on how companies should account for digital assets. Accountants operate out of a consensus among auditors – in their “non-authoritative” voice as they attempt to define the new era in a new report – that cryptos are not considered cash or financial instruments, but rather “intangible assets with an indefinite lifespan.” because they “lack physical substance”.
In general, intangible assets are typically related to a company’s activities and operations – marketing, customer relationships, technological skills, or artistic expression, says Allen Huang, professor of accounting and assistant dean of the Hong Kong University of Science and Technology’s business school. Classifying Bitcoin as such is a challenge. However, this is where accountants are now trying to put crypto into existing categories. And as an intangible asset, Bitcoin’s book value can only go one way: down.
If a company bought Bitcoin for $ 60,000 and the fiscal quarter ended with the cryptocurrency for $ 35,000, its investments would have to be depreciated and written down to $ 35,000 per coin. However, the reverse is not true. A CFO cannot write down her company’s investments if the price climbs back to $ 60,000. It can only do that if the company sells the coins. This makes it difficult for a company to book profits from its crypto assets while at the same time leaving many profit losses open.
In February, those concerns were raised immediately after Tesla announced a $ 1.5 billion Bitcoin investment. It’s an important point. Depending on exactly when Tesla accumulated its stacks of crypto, the electric car maker may have to report an impairment for the June quarter. Which blue chip company wants such a headache on its balance sheet?
In contrast, stocks – which are classified as financial instruments – can be easily written up and written down thanks to what is known as “fair value mark-to-market” accounting in bookkeeping. For example, venture capital giant SoftBank reported net income of 1.93 trillion yen ($ 17.5 billion) in the March quarter, the highest ever for a Japanese company, largely due to unrealized gains from the newly listed Coupang Inc. is due to the fact that SoftBank owns over a third of South Korean e-commerce.
It feels unfair. Often cash-burning, newly listed unicorns – like the now infamous Didi Global Inc. – can be as risky as 12-year-old Bitcoin. Had these unicorns been classified as intangible assets, SoftBank and other VCs would not have been able to claim profits until they sold their holdings.
Still, the accountants are in charge. Companies with the extra cash and willingness to take risks will have a hard time getting into crypto. Granted, many CFOs could stay away from crypto assets anyway due to volatile trading. But the less risk averse would be deterred by a huge institutional hurdle: their accounting firms.
This column does not necessarily represent the views of the editors or Bloomberg LP or their owners.
To contact the editor responsible for this story:
Howard Chua-Eoan at firstname.lastname@example.org
Before it’s here, it’s at the Bloomberg Terminal.