On August 23, 2021, MicroStrategy, the billion-dollar business intelligence company, announced its support for a ‘Fair Value Model’ proposal for crypto holdings reporting. The proposal was presented by the Crypto Council for Innovation (CCI), an organization that aims to advocate for the adoption of digital currencies around the world.
The proposal for the fair value model suggests that companies holding cryptocurrencies should report their holdings based on the fair value of the assets rather than the historical cost. The fair value model is already used for other investment assets and is an internationally recognized accounting standard.
MicroStrategy has been a major advocate for cryptocurrencies, and its CEO, Michael Saylor, has been vocal about his support for Bitcoin and other digital currencies. In August 2020, MicroStrategy announced that it had converted $250 million of its cash holdings into Bitcoin. Since then, the company has continued to buy Bitcoin and currently holds more than 100,000 BTC.
MicroStrategy has also been leading the charge for other companies to adopt Bitcoin as a treasury reserve asset. This has led to a growing trend of companies adding Bitcoin to their balance sheets as a hedge against inflation and a store of value.
In a statement, the CCI said that the fair value model would ensure that companies accurately report their holdings and provide transparency to investors. The proposal would also help to standardize reporting across companies and make it easier for investors to compare and analyze financial statements.
The fair value model is designed to reflect the current market value of an asset, rather than the historical cost. This means that if the value of an asset increases, companies will report a gain, and if the value decreases, they will report a loss. The fair value model is seen as a more accurate reflection of the performance of an investment asset.
The proposal has received support from other companies in the crypto industry, including Coinbase, Fidelity Digital Assets, and Square. These companies have also been active in promoting digital currencies as viable investment assets.
The fair value model proposal is still in its early stages, and it remains to be seen if it will be widely adopted. However, the support from companies like MicroStrategy and Coinbase is a positive sign, indicating that there is growing recognition of the importance of transparency and accurate reporting in the crypto industry.
While there are currently no specific accounting standards for digital currencies, there is growing interest in developing guidelines and regulations to ensure that digital currencies are treated in a consistent and transparent manner. The fair value model proposal is a step in this direction and could help to establish a standard for reporting digital currency holdings.
The proposal also highlights the growing role of digital currencies in the traditional financial industry. As more companies invest in Bitcoin and other cryptocurrencies, there is a need for clear and consistent reporting standards. The fair value model proposal is an important step in this direction and could pave the way for more widespread adoption of digital currencies.
In conclusion, MicroStrategy’s support for the fair value model proposal is a positive development for the crypto industry. The proposal promotes transparency and accuracy in reporting and could help to establish a standard for digital currency holdings. As the crypto industry continues to grow and evolve, the fair value model proposal is an important step towards establishing clear and consistent accounting standards for digital assets.
MicroStrategy, the largest public holder of bitcoin, has backed the proposed rule changes by the Financial Accounting Standards Board (FASB) that would eliminate impairment charges for companies holding crypto assets. Currently, crypto assets are considered as indefinite-lived intangible assets and are tested for impairment, defined as a permanent drop in an asset’s value. If the carrying amount of the asset exceeds its fair value, an entity is required to recognize an impairment loss and reduce the carrying amount of the asset to its fair value. However, if FASB’s amendments are accepted, entities would be required to periodically measure certain crypto assets at fair value and recognize any fair value changes in net income.
MicroStrategy revealed that despite purchasing 140,000 BTC for approximately $4.2 billion, the company currently reports the assets on its balance sheet at $2 billion. This valuation is a result of recording cumulative impairment charges amounting to nearly $2.2 billion. The market value of the company’s bitcoin holdings on March 31 was just shy of $4 billion — about double what it was reported as under the indefinite-lived intangible asset accounting model.
The proposed changes would enable MicroStrategy to provide investors with a more relevant view of its financial position and the economic value of its bitcoin holdings, which in turn would facilitate the ability of investors to make informed investment and capital allocation decisions. A specific accounting standard for crypto assets would similarly spur more companies to hold such assets without fear of impairment charges due to short-term market volatility.
FASB is set to accept comments on the proposed changes until June 6. MicroStrategy endured $18.9 million of impairment losses on its digital assets during this year’s first quarter, an improvement from an impairment of $198 million during the fourth quarter in the last three months of 2022. During the second quarter of 2022, the company incurred impairment charges amounting to $918 million. This period coincided with the crash of algorithmic stablecoin terraUSD (UST) and its associated coin LUNA, which consequently caused a significant drop in the price of Bitcoin.
Tesla, which bought $1.5 billion worth of bitcoin in January 2021, endured a $170 million impairment loss during the second quarter of 2022 despite selling the bulk of its crypto holdings during that span.
In conclusion, the proposed rule changes by FASB have been backed by MicroStrategy, the largest public holder of bitcoin. The proposed changes would enable entities to periodically measure certain crypto assets at fair value and recognize any fair value changes in net income, eliminating impairment charges for companies holding crypto assets. A specific accounting standard for crypto assets would also spur more companies to hold such assets without fear of impairment charges due to short-term market volatility.
