This article comes frombloombergtax, Original Author: Nicola M. White

Odaily Translator |

Odaily Translator |

This Friday (January 21), the cryptocurrency market suffered a bloodbath. The price of Bitcoin fell by more than 10% in 24 hours, and fell to the range of 35,000 US dollars at one point.

The ripples of the market turmoil soon spread, and the performance of many listed companies holding bitcoins faced a severe test. MicroStrategy, the business intelligence software company with the largest number of bitcoins, was the first to bear the brunt. 20%, the biggest intraday drop since February 23, 2021, before closing at $375.89.

To add insult to injury, the SEC rejected MicroStrategy’s bitcoin accounting strategy, meaning that the accounting method they used for bitcoin in their earnings report was non-compliant. In response, the SEC stated:

“We object to your (MicroStrategy) adjusting the Bitcoin impairment charge with a non-GAAP measure, and in future reporting filings, please amend and remove this adjustment.”

In simple terms, MicroStrategy will not be able to remove fluctuations in the value of its massive bitcoin holdings from its unofficial accounting rules — so, what does that mean?

Before answering this question, let us first understand the "GAAP" accounting principles recognized by the US Securities and Exchange Commission. GAAP refers to the Generally Accepted Accounting Principle, that is, the generally accepted accounting principles. Accounting Research Bulletin No. 1, created a precedent for government agencies or industry organizations to promulgate "general general accounting", which refers to enterprises in various industries, including basic accounting concepts, basic assumptions and other basic principles to specific accounting measurement and accounting. Provisions on procedures and methods for preparing financial statements guide enterprises in recording and reporting financial information.

But for now, MicroStrategy's "wishful thinking" may be in vain, because the US Securities and Exchange Commission has clearly opposed their use of non-GAAP strategies. But--

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Is the US Securities and Exchange Commission's statement necessarily correct?

MicroStrategy began buying bitcoins in 2020 as part of its capital allocation strategy. As of the end of 2021, MicroStrategy held a total of 124,391 bitcoins, investing a total of about $3.75 billion, with an average purchase price of about 1 bitcoin per bitcoin $30,159.

Despite the SEC's objection to MicroStrategy's use of non-GAAP, there are no rules for reporting the value of digital assets in GAAP. Previously, the American Institute of Certified Public Accountants issued non-binding guidance stating that businesses should classify “currency” as an intangible asset, meaning that businesses that do not qualify as investment firms can only record cryptocurrencies at historical cost. Moreover, if it is an "intangible asset", generally accepted accounting principles only allow adjustments when the value falls, and if the price rises, the company cannot readjust the value.

Therefore, for MicroStrategy companies that hold a large amount of Bitcoin, holding a volatile asset such as Bitcoin will face a problem: the book value can only be recorded as "shrinkage."

In fact, MicroStrategy had previously told the SEC that using non-GAAP measures would give investors a fuller picture of its financials. However, if the company can only record the decline in value and reflect it on its books, it cannot conduct a "complete evaluation" of its bitcoin holdings based on the company's strategy of acquiring and holding bitcoin, which "has no impact on management or investment It doesn't make much sense to the reader."

However, the US Securities and Exchange Commission does not seem to agree with MicroStrategy's explanation.

MicroStrategy has been an advocate for changing the current cryptocurrency accounting rules. They wrote to the US Financial Accounting Standards Board last year, asking US accounting rulemakers to build better rules to reflect the true value of cryptocurrencies. corresponding. According to Bloomberg reporter Crystal Kim, with the high-profile investment of large listed companies such as MicroStrategy and Tesla in Bitcoin, more and more companies are calling for new rules for digital asset accounting standards, and rulemakers have indicated that they will study this issue. .