New Cryptocurrency Accounting Rules Bring Fair Value to Boost Profits for Tesla and MicroStrategy
According to a recent announcement from the FASB, new cryptocurrency accounting rules will bring major changes to the way companies like enterprise software giant MicroStrategy, electric car company Tesla, and payments processor Block report their cryptocurrency holdings. The FASB now requires companies holding Bitcoin, Ethereum or other cryptocurrencies to record these assets at their fair market value.
Does fair value help with cryptocurrency accounting?
Under new guidance set by the Financial Accounting Standards Board in its first cryptocurrency accounting regulations, cryptocurrency-focused companies and other companies investing in Bitcoin or Ethereum will now use the fair value method to account for these assets. must be reported. This approach is designed to reflect the latest valuations of these digital currencies. As a result, changes in fair value are reflected directly in the company’s net income.
Previously, it only allowed companies to report the lowest value of their cryptocurrency holdings. This approach has been controversial, especially for companies that have invested heavily in Bitcoin. This is because the result is conservative and often diminishing returns on assets.
Given the extreme volatility of the cryptocurrency market, this often leads to a reduction in the reported value of your holdings, negatively impacting your returns. However, this new rule now allows you to record the highs and lows of specific assets, increasing your net profit.
Implementation of this new rule is scheduled for fiscal years beginning after December 15, 2024. This means that companies with matching fiscal years will begin applying this rule in 2025. However, there are options for businesses to adopt these new rules. If you decide to do so, you must comply with the standards well in advance of the deadline.
In September, the FASB voted on these new rules to draft a final version, which has now been finally approved.
Big changes in American accounting practices
The updated ASU enhances transparency for investors by requiring disclosure of significant cryptocurrency holdings, contractual sales restrictions, and changes to reporting periods.
These amendments address intangible assets under FASB standards, assets that lack enforceable rights to the underlying assets, assets that exist on blockchain or similar technologies, and assets that are cryptographically secured and fungible and that have not been issued by the reporting entity or its affiliates. Applies to.
Until recently, U.S. accounting lacked standards for recognizing and measuring digital currencies. The cryptocurrency industry has been appealing to the FASB since 2017, but there has been no response so far.
In the absence of regulations, non-investment companies have followed guidelines from the American Institute of Certified Public Accountants to treat cryptocurrencies as intangible assets like trademarks or copyrights. The company recorded the cryptocurrency at its purchase price to indicate its decline in value and only recorded the actual sale profit.
Companies with Bitcoin on their balance sheets, such as electric car manufacturer Tesla (TSLA) and business software company MicroStrategy (MSTR), are expected to welcome this change. Previously, you had to report unrealized losses on your Bitcoin investments.