Accounting firms are restricting corporations from holding the cryptocurrency as assets even as they give free rein to venture capital firms — such as SoftBank Group Corp. — to invest in equally risky and volatile unicorns. MicroStrategy Inc. and Elon Musk's Tesla Inc. own Bitcoin but they are exceptions. One survey found that only 5 per cent of finance executives plan to invest in Bitcoin this year.
That mindset is getting in the way of the broader adoption of Bitcoin and other cryptos because companies holding such digital currencies bear an accounting risk: big asset write-downs.
This is happening even though there are no official guidelines under the Generally Accepted Accounting Principles (GAAP) over how companies should account for digital assets. Accountants are operating out of a consensus among auditors — in their “non-authoritative” voice as they try to define the new era in a new report — that cryptos are not considered cash, or financial instruments, but “indefinite-lived intangible assets” because they “lack physical substance.”
In general, intangible assets tend to be related to a company's activities and operations — marketing, customer relations, technological skills, or artistic expressions, says Allen Huang, accounting professor and associate dean at the Hong Kong University of Science and technology's business school. Classifying Bitcoin as such is a stretch. However, that's where it is now as accountants try to fit crypto into existing categories. And, as an intangible asset, Bitcoin's book value can go only one way: down.
If a company bought Bitcoin at $60,000, and the fiscal quarter ended with the crypto at $35,000, its investments will have to be impaired and written down to $35,000 per coin. The converse, however, is not true. A chief financial officer can't write up her firm's investments if the price goes back up to $60,000. She can do that only when the company sells the coins. This makes it difficult for a company to book gains on its crypto assets, while leaving open plenty of earnings downside.
In February, this concern was raised right after Tesla disclosed a $1.5 billion Bitcoin investment. It's an important point. Depending on when exactly Tesla accrued its crypto pile, the EV maker might have to report an impairment for the June quarter. What blue-chip company wants to have that kind of headache on its balance sheet?
In contrast, stocks — classified as financial instruments — can easily be written up and down, thanks to what, in accountant-speak, is called “fair value, mark-to-market” bookkeeping. For instance, in the March quarter, venture capital giant SoftBank reported net income of 1.93 trillion yen ($17.5 billion), the most ever for a Japanese company, with essentially all of that due to unrealized gains from the newly public Coupang Inc. SoftBank owns over one-third of the South Korean e-commerce.
It feels unfair. Often cash-burning, newly-listed unicorns — such as the now-infamous Didi Global Inc. — can be as risky as 12-year-old Bitcoin. Had these unicorns been classified as intangible assets, SoftBank and other VCs would not have been able to claim profits until they sold their holdings.
Nonetheless, the accountants hold sway. Companies with extra cash and are willing to take on risk will find it hard to go into crypto. Granted, many CFOs may stay away from crypto assets anyway because of volatile trading. But the less risk-averse would be deterred by a huge institutional roadblock: their accounting firms.
