MicroStrategy’s Accounting Spat Reveals Void in Crypto Rules

The SEC’s high-profile objection to MicroStrategy Inc.’s accounting for Bitcoin put a spotlight on the lack of official accounting rules for the volatile cryptocurrency.

For digital asset enthusiasts, it was a round of ammunition to motivate U.S. accounting standard-setters to correct that oversight soon.

“It’s a real wake-up call to regulators and policy makers that crypto assets are moving more and more out of a fringe footnote issue and to a mainstream balance sheet issue,” said Sean Stein Smith, assistant economics professor at Lehman College in New York.

The Financial Accounting Standards Board may be listening. After years of rejecting calls to write crypto accounting guidance because too few companies dabbled seriously in crypto, the board in December agreed to research the topic. The standard-setter plans to meet by midyear to discuss the research, a FASB spokesperson said.

While MicroStrategy’s accounting spat with the SEC generated headlines, that won’t necessarily push FASB to move faster, though. MicroStrategy is still an outlier among public companies when it comes to the size of its Bitcoin holdings.

“It’s obviously a very big company and a very big company that has a lot of people following it. They will absolutely take it into weight, but there are more implications that they’re trying to weigh,” said Matthew Schell, partner at Crowe LLP.

“I don’t know that this is like, ‘Well, MicroStrategy had a problem, so we’re slam dunking it,’” Schell said of FASB’s agenda priorities

SEC Scrutiny

MicroStrategy went all in on Bitcoin in 2021, announcing that in addition to making and selling enterprise software, buying and holding Bitcoin would be a core business strategy. The company scooped up
a total of
$3.75 billion worth of Bitcoin by year end.

But accounting for that crypto haul was tricky. There’s no piece of U.S. generally accepted accounting principles (GAAP) that spells out how to account for digital assets. Nonbinding guidance from the American Institute of CPAs calls on businesses that aren’t investment companies or broker dealers to record their crypto as intangible assets. Intangible assets get recorded on balance sheets at historical cost and only get updated when the value declines, such as in a price dip—never if the value bounces back.

Bitcoin’s volatility zapped $65 million from MicroStrategy’s official GAAP income in the third quarter of 2021. So the company offered investors a supplementary, unofficial figure, stripping out the impairment and painting a more flattering picture of the company’s bottom line. While companies routinely offer non-GAAP measures to investors, there are strict rules around them, and the SEC said the measures didn’t comply.

The company said it would followthe agency’s directive to not ignore the Bitcoin impairments in future filings. MicroStrategy has also said it will keep buying and holding Bitcoin, regardless of the accounting outcome.

But the company is vocal about the need for clear accounting rules. MicroStrategy’s chief financial officer was one of hundreds of individuals, auditors, and investors that wrote letters to FASB asking the accounting rulemaker to prioritize writing rules that better reflect the market value of crypto holdings.

“Pick a price at the end of the quarter from a common exchange and that’s the amount that everyone should mark to—we expressed that that’s the right answer. That’s what many accounting firms think is the right answer. It’s only a question of when is FASB going to take this up,” CFO Phong Le said in a recent interview.

On FASB’s Agenda

FASB is a deliberative, slow-moving organization and one company’s accounting tussle with the SEC won’t be enough to fast-track its research. But the overall trend in the market toward crytpo acceptance very well could, said Thomas Linsmeier, who was a FASB member from 2006 to 2016.

“With the growth in that market and lack of transparency in financial reporting about those risks, especially given that FASB doesn’t complete projects on a very expedited basis, it would be good to get in front of it,” said Linsmeier, who chairs the accounting department at the Wisconsin School of Business.

Still, FASB will have a lot to wrestle with if and when it tackles the issue. As the SEC’s top accountant has warned, digital assets run the gamut, from cryptocurrencies to initial coin offerings. Setting parameters around what to focus on will be a challenge, as will keeping tabs on regulator action in the space.

FASB could avoid a years-long, winding endeavor by zooming in on the most pressing questions first—putting parameters around what assets can be measured at fair value, Linsmeier said.

Good accounting rules are supposed to reflect the true economics of a transaction, Linsmeier said.

“I don’t think calling it an intangible asset or calling it cash or cash equivalent faithfully represents at all; it’s an investment,” he said.

—With assistance from Crystal Kim of Bloomberg News.

https://news.bloombergtax.com/financial-accounting/microstrategys-accounting-spat-reveals-void-in-crypto-rules

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