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Crypto Accounting Rules Signal MicroStrategy, Tesla Benefits (1)

Aug. 31, 2022, 3:11 PMUpdated: Aug. 31, 2022, 3:32 PM

US accounting rulemakers took a significant step Wednesday toward crafting long-awaited rules for how companies report holdings of cryptocurrencies like Bitcoin, a move that would bring clarity to big crypto investors like Tesla Inc. and MicroStrategy Inc.

Their first move: defining the exact, narrow population of digital assets that potential new rules would cover. A narrow focus is essential, according to members of the Financial Accounting Standards Board, who said they want to cover accounting for common cryptocurrencies but not non-fungible tokens, or NFTs.

Setting parameters moves the market toward getting official accounting for digital currencies and replacing guidance that calls for treating crypto on company balance sheets like intangible assets. That treatment means the value of currencies like Bitcoin and Ethereum can only be adjusted downward, never back up if the market rebounds.

FASB received hundreds of requests last year to write formal rules for operating companies that invest in digital currencies. The lack of such rules means companies like Tesla and MicroStrategy report hits to earnings when the value of the Bitcoin they hold dips. They never get to record recoveries.

“We’ve heard crystal clear from companies, investors: The current accounting doesn’t work,” FASB member Gary Buesser said.

MicroStrategy has spent almost $4 billion buying Bitcoin in the past two years, leading to major write-downs as crypto values have tumbled since their November 2021 peaks. CEO Michael Saylor has been sharply critical of the current accounting rules, which mean that even if Bitcoin bounces back, the upside won’t appear in the company’s audited accounts.

According to FASB’s new working definition, assets that are created or reside on blockchains and are secured through cryptography would be covered by potential new rules. They would have to meet the definition of an intangible asset but couldn’t meet the definition of a contract, as outlined in US accounting literature.

They would also have to be fungible, meaning they can be interchanged with other assets of the same type. NFTS—unique digital tokens that can cover anything from pictures of apes to digital baseball cards—aren’t interchangeable.

The working criteria would ensure that digital intangible assets like software, data, or electronic contracts wouldn’t get caught up in new guidance, FASB said.

The draft definition largely mirrors the definition of crypto assets included in the American Institute of CPAs’ digital assets practice aid, which provides non-authoritative guidance on how existing accounting rules apply to cryptocurrencies.

FASB plans to discuss how to measure crypto assets at a future meeting. Formal rules for cryptocurrency accounting won’t become enshrined in US accounting rules until FASB releases a proposal for public comment, weighs feedback, makes tweaks and publishes a final set of rules.

(Updated with additional detail throughout.)

To contact the reporter on this story: Nicola M. White in Washington at nwhite@bloombergtax.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergindustry.com; Kathy Larsen at klarsen@bloombergtax.com