Game-Changing Accounting Rules
It just became much easier for corporations to add bitcoin (and other crypto assets) to their balance sheets without scaring off investors or accountants.
Last week, the Financial Accounting Standards Board (FASB), the US body that sets the rules for how companies should keep their financial books, unanimously voted to allow companies to report their crypto holdings at fair market value.
To translate: It just became much easier for corporations to add bitcoin (and other crypto assets) to their balance sheets without scaring off investors or accountants.
And, overall, it’s a huge boon for institutional/corporate adoption.
Let’s break it down.
Right now, corporations like MicroStrategy (MSTR) – who’ve been forward-thinking enough to add bitcoin to their balance sheets – are required under US Generally Accepted Accounting Principles (GAAP) to classify their crypto holdings as "intangible assets."
This classification only allows for companies to record the purchase price of the crypto asset and then perform periodic "impairment tests." For example, if the market price of bitcoin falls below the purchase price, the company must write down the value of the asset and take an impairment charge against earnings.
But here’s the kicker – companies are not allowed to write up the asset value if bitcoin's price recovers. In fact, impairment losses cannot be recovered for any subsequent increase in fair value until the sale of the asset.
So… you can mark down, but you can’t mark up.
This obviously creates a huge accounting headache and is ill-suited given crypto’s volatility. The FASB's recent decision, however, is poised to change that.
Under the new rules, companies can report their crypto holdings at fair market value. The big difference here is that the most recent valuations, including rebounds after a price drop, can be captured. It's a move that will certainly reflect a more accurate financial picture for firms holding bitcoin and other crypto assets.
Companies like MicroStrategy are likely to benefit the most immediately, which partially accounts for the jump in MSTR share prices following the news.
Under the old rules, balance sheets were taking hits left and right thanks to bitcoin's price fluctuations, even if the overall trajectory was positive. No more of that nonsense.
Fair value accounting is coming to #Bitcoin. This upgrade to FASB accounting rules eliminates a major impediment to corporate adoption of $BTC as a treasury asset.
— Michael Saylor⚡️ (@saylor)
Sep 6, 2023
But, and there's always a but, the new rules won't go into effect until 2025, although companies have the option to apply them early.
To add, the new accounting measures won't cover all types of digital assets. Wrapped tokens, stablecoins, as well as NFTs, didn’t make the cut.
Despite these limitations, Jeff Rundlet, head of accounting strategy at Cryptio, calls this a "great step toward mainstream adoption." And we're inclined to agree.
The Bigger Picture
In an era where inflation is increasingly viewed as public enemy no. 1, safeguarding cash reserves has never been more crucial, particularly for large public corporations.
The forthcoming accounting adjustment – though not immediate – has the potential to reinvigorate institutional interest in bitcoin. If this narrative strengthens in the coming years, it could drastically reduce the available supply, or "free float," of bitcoin in the market, thereby exerting upward pressure on its price.