The risk of bitcoin on a public company's balance sheet
Most publicly traded companies can only realize losses on crypto assets under U.S. accounting rules today. Gains only count if they sell.
Why it matters: Fifteen publicly traded companies have more than 1,000 bitcoin on their balance sheets (over $20 million worth), according to Bitcoin Treasuries.
- During the 2021 boom times, lots of public companies got into bitcoin. Some of them said it was a hedge against inflation. Others probably just hoped they could record an easy win one quarter.
- Under U.S. Generally Accepted Accounting Principles (US GAAP), as currently interpreted today, the price of bitcoin can only go down, at least for most public companies.
In the weeds: There isn't actually a US GAAP rule on bitcoin and cryptocurrencies, though — not yet. The practice is based on an interpretation of existing rules.
"There was a view that you had to take a conservative stance, hence you had to view it as an intangible asset," Markus Veith, who leads the digital asset practice at Grant Thornton, one of the country's largest tax advisory and accounting firms, tells Axios in an interview.
- Intangible assets are things like software, intellectual property or patents.
- Such assets can be valuable, but they are hard to price because they seldom trade. "Superman" is intellectual property, and he is undoubtedly valuable, but he doesn't go on the market very 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 trades 24/7.
- "Plain and simple, as a public company you have to measure the impairment. The cost goes down, it doesn't go up," Veith explains.
Of note: Public companies can only realize a gain from its cryptocurrency holdings by selling (though there's an exception for investment firms).
Zooming out: This means companies like Tesla or Block, Inc (Square) are realizing losses on the bitcoin they bought in the good times.
Yes, but: It's not that way everywhere. Under International Financial Reporting Standards (IFRS), companies can mark digital assets to market. IFRS is used in Canada and Europe and lots of other places, just not the biggest crypto market on Earth: the U.S.
- 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 watching: The directive for public companies to treat cryptocurrency as an intangible asset comes from the U.S. Securities and Exchange Commission, which is relying on the standard setting body, the Financial Accounting Standards Board (FASB).
- FASB has a project under way now to update how it treats digital assets.
- "If the FASB comes out with guidance that says you can mark to market, then the SEC will say yes," Veith said. "Their word is gold."
The bottom line: So if holding bitcoin can only put losses on the books for a public company in the U.S., why would any of them 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.