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Bitcoin, ‘Green’ Details Are Most-Requested Accounting Fixes

Oct. 4, 2021, 8:46 AM

The public is clamoring for clear rules on cryptocurrency accounting, according to hundreds of letters inspired by software company Microstrategy Inc. that tell U.S. accounting rulemakers that companies that invest in Bitcoin end up with financial statements that don’t make sense.

“This disconnect between an entity’s financial statements and the economic reality of its financial condition and results of operations creates confusion and fails to provide investors, analysts, and the general public with the information they need to make an informed assessment of an entity’s current and future prospects,” Microstrategy recently wrote to the Financial Accounting Standards Board. The company since August 2020 has added $3.2 billion of Bitcoin to its coffers, which it estimates to have a fair value of $5.5 billion.

FASB doesn’t decide to take action based on the number of letters it receives, but the volume was notable. The Big Four accounting firms, an American Institute of CPAs panel, some investor groups, and individual businesses also asked the board to take action on cryptocurrency accounting. The requests were in response to FASB’s wide-ranging call for input on its long-term agenda. Comments were due Sept. 22.

FASB laid out several options in the document, including hot-button topics like accounting for digital assets, the impact of climate risk, the taxes large multinational companies pay overseas, and the unofficial—and often flattering—accounting measures businesses use to convey their earnings.

Under non-binding guidance from the AICPA, companies that aren’t investment companies report digital currency as intangible assets. This means cryptocurrencies get recorded on company balance sheets at their historic cost and are then written down, or impaired, if the value dips. But the value can never be revised upward if the price of a digital coin increases.

FASB has rejected several previous calls to tackle accounting for digital assets, saying most companies don’t have significant holdings, and if they accept the currency as payment, they immediately convert it to cash. As more companies bet on Bitcoin and its peers, however, calls have gotten louder, including from investors.

“We recommend that the FASB begin a project on accounting for digital assets immediately; waiting until they become pervasive in financial reporting may put the FASB so far behind, they may never catch up,” wrote a group called the Alliance of Concerned Investors, which in October 2020 wrote a critique of the accounting board for ignoring investors’ top concerns.

Beyond Bitcoin

After digital assets, requests that the board tackle “green” accounting came in second. Several groups, including the Big Four, asked FASB to take action on environmental, social, and governance (ESG) issues.

The Council of Institutional Investors called on FASB to require footnote disclosures on risks relating to human capital management, such as the total cost of a company’s workforce and climate change.

“CII believes that climate change is a systemic risk, so it is critical that investors can access clear disclosures of the risks it poses to long-term value creation by the companies in which they invest,” the group wrote.

These issues affect money decisions. Interest rates on some loans and deposits are based on a counterparty’s performance as measured against certain ESG-related targets, the Securities Industry and Financial Markets Association noted. The popularity of these products is growing, and businesses may need help in accounting for them, the group said.

Taxes

Familiar battle lines emerged in the debate about whether companies should break down, or disaggregate, their income taxes by U.S. and overseas locations. Investors and watchdog groups pressed FASB to require key breakdowns, while individual businesses and a major trade group, Financial Executives International, said to drop the idea.

Current reporting offers sufficient detail, said Verizon Communications Inc. “If there is any significant global tax risk, we would include discussion in the ‘risk factors’ to our annual SEC filings,” the company wrote.

Performance Reporting, Government Grants

Several groups asked FASB to focus on requirements that would help investors understand earnings quality. The Alliance of Concerned Investors recommended FASB explore requiring standardized presentation of common key performance indicators in audited financial statements and improving the cash flow statement, including by requiring a reconciliation of cash flows to comprehensive income.

But Charter Communications Inc. raised alarm bells about rules that could force companies to break down financial information that could end up being inconsistent with how management views the business. “For example, the potential breakdown of operating results by regulatory jurisdiction and product lines is fundamentally inconsistent with how Charter delivers services over a single national network managing profitability at the customer relationship level,” the company wrote.

Several other groups, including audit firms, also asked FASB to take on how companies recognize and measure assistance they receive from the government. Questions about how to account for government aid became prevalent during the pandemic, when businesses received an influx of help to stay afloat.

A Break, Please

While plenty of groups gave FASB long to-do lists, several others told the board to lay low for a while, noting that U.S. public companies just went through back-to-back, once-in-a-generation changes on how to account for revenue, leases, and credit losses. Now, they said, companies need a break from major changes.

The new rules have “driven compliance costs up and diverted resources away from other initiatives and yielded minimal benefit to the users of financial statements,” wrote Verizon Communications Inc.

“Over the next few years, we believe that the financial community could use a respite from major standard setting activities,” said Mind the GAAP LLC and Wipfli LLP.

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; David Jolly at djolly@bloombergindustry.com

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