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FASB's Crypto Accounting Shift: Potential Corporate Investment Boost

Sep 8, 2023 at 11:53 am

The U.S. accounting standards board has unanimously endorsed the use of "fair value" accounting for corporate-held crypto assets.

A significant shift in how U.S. companies account for cryptocurrencies like bitcoin (BTC) may encourage more businesses to invest in them, says a prominent Wall Street research firm and a vocal supporter of bitcoin in corporate America.

At present, accounting regulations only allow companies to record gains in the value of their digital assets when they are sold, while losses are acknowledged at least annually. However, the Financial Accounting Standards Board (FASB) voted to take a different approach, enabling companies to employ fair-value accounting. This permits them to report gains and losses immediately on their income statements.

Stifel analysts called this decision a noteworthy development, highlighting that the generally accepted accounting principles (GAAP) in the U.S. compel companies to write down the value of crypto assets when prices decrease, but do not allow them to reverse these write-downs if prices subsequently rebound. This means that balance sheets can show considerably lower values than what the assets would command in the open market.

The Stifel team suggested that we might witness a greater inclination among U.S.-based companies to hold digital assets on their books, especially during bullish market periods, due to the positive impact on their financial performance.

Michael Saylor, the Executive Chairman of MicroStrategy (MSTR), which began accumulating bitcoin on its balance sheet roughly three years ago, expressed less reservation, asserting that the rule update "eliminates a major impediment to corporate adoption of bitcoin as a treasury asset."

The Stifel team pointed out that MicroStrategy's approximately 152,300 bitcoin at the end of the second quarter were listed on the company's books at a value of $2.3 billion. This was a significant 50% (or $2.3 billion) less than their fair market value at the time.

However, it's worth noting that one factor that may influence the adoption of crypto by companies is the level of risk aversion among CEOs and other senior executives, whose responsibility is to manage their businesses, allocate reserves prudently, and deliver somewhat predictable earnings.

James Lavish, a former hedge fund manager, emphasized in November that most companies are widely held and not controlled by a single majority owner, unlike Michael Saylor and MSTR. The career risk for those in charge is just too great for them to allocate their treasury cash to bitcoin instead of holding it in cash or U.S. Treasuries.

FASB is expected to officially approve the final language later this year, at which point companies will be free to adopt the new standards. The transition to fair-value accounting will be mandatory starting from the calendar year 2025.

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