The SEC Objects To MicroStrategy Accurately Valuing Their Multibillion-Dollar Bitcoin Stash

  • Since 2020, MicroStrategy has begun investing in bitcoin as a component of its capital allocation plan. Over 120,000 BTC are held by the firm.
  • In the absence of its FASB’s crypto-specific regulations, the American Institute of CPAs (AICPA) organized a working committee in 2020 to develop a Practitioner’s Guide to Digital Assets, the classification of cryptocurrency in GAAP financial accounts.
  • Crypto assets could not be categorized as cash or cash equivalents in GAAP financial statements, as per the AICPA white paper.

What took place?

Since 2020, MicroStrategy has begun investing in bitcoin as a component of its capital allocation plan. Over 120,000 BTC are held by the firm. By the end of December 2021, at the latest. MicroStrategy is obligated to record bitcoin-related earnings and transactions under its generally accepted accounting principles (GAAP) standards because it is a publicly-traded corporation in the United States. 

The proper accounting of these transactions within GAAP financial statements, on the other hand, is still a work in progress. Current GAAP standards, which define digital assets like intangible assets as having an indefinite life (akin to goodwill as well as trademarks), fail to represent bitcoin holdings’ real financial behavior. Whenever the value of a digital asset goes below its cost, this technique requires corporations to record losses; yet, it prevents companies from marking a digital asset for its genuine worth when prices rebound.

MicroStrategy introduced a Non-GAAP Economic Measures clause to solve GAAP earnings shortfalls owing to bitcoin loss losses. In the quarter concluded on September 20, 2021, fill out Form 10-Q (Quarterly Financial Reports Public Companies File with the SEC). The SEC, on the other hand, was against the new treatment.

Important Ideas

The Financial Accounting Standards Board (FASB) represents the equivalent of the Internal Revenue Service in the accounting industry. The FASB is in charge of developing widely accepted accounting rules (GAAP). There are no cryptocurrency-specific GAAP regulations in existence as of its date of publication.

In the absence of its FASB’s crypto-specific regulations, the American Institute of CPAs (AICPA) organized a working committee in 2020 to develop a Practitioner’s Guide to Digital Assets, the classification of cryptocurrency in GAAP financial accounts.

How are bitcoins classed under GAAP Financial Standards?

Crypto assets could not be categorized as cash or cash equivalents in GAAP financial statements, as per the AICPA white paper, because they were not backed by any sovereign government or legally considered tender. They aren’t really cash (for the reasons stated above) and do not reflect any legal right to earn cash or any economic instruments, hence they cannot be categorized as any financial instrument or asset. 

Furthermore, because cryptocurrencies are ethereal, they do not properly fulfill the concept of inventory and hence cannot be recorded on the financial statements as inventory. They only possess one category remaining to identify bitcoins after passing through the elimination process: virtual assets having an indefinite existence. MicroStrategy now categorizes bitcoin in its economic statements in this way.

Virtual assets: In accordance with Accounting Standard Codification (ASC) 350, Intangibles-Goodwill et al., the Company treat its virtual assets like indefinite intangible asset. The cost of the company’s virtual assets as originally recorded. Following that, they are valued at cost, minus any impairment losses that have occurred since the acquisition.

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