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Tesla Bitcoin Bet Exposes Limits of Crypto Accounting Rules

Feb. 9, 2021, 7:48 PM

For years, U.S. accounting rulemakers have rejected calls to write accounting rules for digital assets like Bitcoin, saying too few companies make significant investments in them. Now enter Elon Musk.

Musk’s Tesla Inc. announced Monday that it had invested $1.5 billion in the volatile cryptocurrency, and overnight the conversation changed. Tesla’s investment, the largest for a U.S. business, brings Bitcoin into the mainstream and reveals the digital currency hole in the U.S. accounting rulebook.

The electric car maker’s disclosure came on the heels of software company MicroStrategy Inc.'s December issuance of $650 million in convertible bonds to buy and hold Bitcoin, and Paypal Holdings Inc.'s October announcement that customers could buy, sell, or hold cryptocurrency through their accounts.

“Tesla and MicroStrategy are not a flash in the pan,” said Kell Canty, CEO of Verady Inc., a digital asset tax and accounting software company. “Sooner rather than later is what the approach should be. It becomes a pressing need for the financial accounting industry.”

There are no rules for digital assets in U.S. generally accepted accounting principles, or GAAP. The Financial Accounting Standards Board has formally rejected at least three requests to craft rules.

The basis for the latest rejection, in October, was that too few companies had material holdings in digital assets. While at the time companies like Overstock Inc. and Microsoft Corp. allowed customers to make payments in cryptocurrency, they turned those payments to cash. Such transactions don’t stay for long on a company’s balance sheet, eliminating any financial reporting questions.

Investments are another ball game. By their nature they endure as assets on company balance sheets. The investments matter to analysts and readers of company financial statements.

Industry Guidance

Absent formal accounting rules, the American Institute of CPAs in December 2019 issued non-binding guidance that cryptocurrency like Bitcoin should be accounted for as intangible assets, in accordance with ASC 350 Intangibles-Goodwill, Other. The panel that wrote the guidance reasoned that cryptocurrency didn’t meet the requirements in U.S. GAAP to be considered a financial instrument or inventory, said Matthew Schell, partner at Crowe LLP and a co-chair of the group that issued the guide.

The upshot: A company buying or investing in Bitcoin takes the value of the cryptocurrency at cost and records it as an asset on its balance sheet. There it stays, at the same amount, unless its value declines. If the company sees signs that the value has weakened, the company must record an impairment, which hits the income statement and reduces earnings. It must test the asset for impairment at least once a year, but more often if there are indications that the value is lower.

For a wildly fluctuating currency like Bitcoin, there could be plenty of signs prompting the company to test for impairment. But spikes in value get ignored. Under the accounting rules, a company can’t adjust the value of the asset upward. If it sells the currency at a high point, that’s when it gets to record the gains, Schell said.

There is nuance to the AICPA’s guidance. If a company qualifies as an investment company, as defined by ASC 946, Financial Services-Investment Companies, then it would account for the digital asset at fair value, which captures up and down movements in value, according to the guide.

For operating companies like Tesla and MicroStrategy, their holdings in Bitcoin will be accounted for as intangible assets. Tesla explained the accounting treatment in its Feb. 8 annual filing, and warned investors that impairments to the value of its Bitcoin could hit its earnings.

“As we currently intend to hold these assets long-term, these charges may negatively impact our profitability in the periods in which such impairments occur even if the overall market values of these assets increase,” Tesla wrote.

To Sean Stein Smith, assistant economics professor at Lehman College in New York, the accounting treatment is akin to fitting a “square peg into a round hole.”

“The asset class is too volatile, too fast-moving, too fast-growing to permanently cap it with an accounting treatment that is not built for a digital asset,” Smith said. He was one of three people who co-signed the last request to FASB to tackle accounting for digital currency.

FASB Holding Firm

In a statement Monday, FASB stood by its October decision not to develop new accounting rules for digital assets.

“The recent investment by one entity, in and of itself, would not have changed that evaluation,” the board said.

FASB is currently researching improvements to intangible assets, broadly, but is primarily focused on intangible assets that a company generates itself.

“While digital currencies are not currently the focus of the research project, that topic could be considered as part of the research project in the future,” the board said.

To contact the reporter on this story: Nicola M. White in Washington at

To contact the editors responsible for this story: Jeff Harrington at; David Jolly at