Can we fair value the “HODL”?
Crypto hedge funds reporting under U.S. GAAP usually qualify for “investment company” accounting and reporting under Accounting Standards Codification (“ASC”) 946, Financial Services — Investment Companies, resulting in the ability to fair value their crypto “HODLings”.
However, what about operating companies like Microstrategy, Tesla, and Square that have now collectively invested billions in Bitcoin?
Let’s see what their recent SEC filings reveal…
“During the second half of 2020, the Company purchased an aggregate of $1.125 billion in digital assets, comprised solely of bitcoin. The Company accounts for its digital assets as indefinite-lived intangible assets…” 
“In October 2020, we invested $50 million in bitcoin to further our commitment to cryptocurrencies. We expect to hold this investment for the long term. As bitcoin is considered an indefinite lived intangible asset, under the accounting policy for such assets we will be required to recognize any decreases in market prices below cost as an impairment charge, with no upward revisions when the market prices increase…” 
“In January 2021… we invested an aggregate $1.50 billion in bitcoin… Moreover, we expect to begin accepting bitcoin as a form of payment for our products in the near future… We will account for digital assets as indefinite-lived intangible assets… The digital assets are initially recorded at cost and are subsequently remeasured on the consolidated balance sheet at cost, net of any impairment losses incurred since acquisition.” 
Wait, so we’re stuck with indefinite-lived intangible at cost?
In the absence of specific authoritative digital asset accounting guidance from the FASB, crypto assets such as bitcoin are now generally recognized and accounted for as indefinite-lived intangible assets under Accounting Standards Codification (“ASC”) 350, Intangibles—Goodwill and Other. Other asset categories, cash, cash equivalents, financial instruments or financial assets, and inventory don’t qualify.
So, we’re stuck with indefinite-lived intangible…? (accountant moves around uncomfortably).
Yup and that means bitcoin will be initially (and subsequently) measured at cost, net of impairment losses. That also means the subsequent reversal of previously recorded impairment losses is prohibited.
So even if bitcoin soars to new all-time highs (hello $50,000!) the carrying amount will remain at cost net of accumulated impairment losses on the balance sheet. Only downward adjustments. Upward movements are ignored.
Is this the most decision-useful accounting policy to the users of financial statements under U.S. GAAP?
Clearly, the accounting rules restrict the accounting function to accurately reflect the economics of an entity’s digital asset holdings. Fortunately (whew) one can still provide meaningful disclosures, such as the number of coins and fair value at the date of issuance of the financials.
When new (authoritative) guidance?
Over the years the FASB rejected several requests to add a project on digital currencies to its agenda and their meeting on October 21, 2020, proved no different. Some have stated the FASB has still not changed its decision due to too few operating companies with material holdings in digital assets.
In the interim, the AICPA has released a nonauthoritative practice aid on how to account for and audit digital assets under U.S. generally accepted accounting principles and generally accepted auditing standards.
Microstrategy, Square, and now Tesla are all invested in bitcoin. Who’s next and what will it take for the FASB to finally prioritize digital asset accounting guidance?
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Disclaimer: This article is for informational and educational purposes only and does not constitute financial or investment advice.