The Bitcoin-loving billionaire Michael Saylor has spent months pushing for rule changes surrounding cryptocurrencies and their accounting procedures. On Wednesday, was finally granted his wish.
The Financial Accounting Services Board (FASB) has agreed to adopt fair value accounting procedures for digital assets. This will theoretically make assets like Bitcoin more attractive for companies to hold on their balance sheets.
The New Accounting Model
As reported by the Wall Street Journal, the FASB said during its latest meeting that fair value accounting “best captures the economics of crypto assets.” In fact, they are determined to make the standard a requirement, rather than an option.
“We’ve heard from investors that they want transparency through disclosure, and the only way to get to that is fair value,” said board member Gary Buesser.
Fair value accounting simply involves calculating a company’s assets based on their current market price. In other words, accountants can immediately respond to the often volatile movements in the crypto market.
Prior to this change, Bitcoin was treated as a “long-lived intangible asset,” whose price was only reviewed once per year when being reported in financial statements and earnings reports.
Under this system, companies could not increase the value of Bitcoin on their balance sheets if the price went above their initial purchase price –unless it was sold into fiat currency beforehand. By contrast, they were still obliged to write down the value of their holdings if Bitcoin dipped below their initial purchase price.
In other words, Bitcoin’s value could only go down on one’s balance sheet until it was sold. This rule contributed to numerous disclosures from high-profile Bitcoin whales – including Tesla and MicroStrategy – of impairment charges in the hundreds of millions during the worst quarters of the bear market.
As such, MicroStrategy has been advocating for a change to Bitcoin’s accounting rules to something more appropriate for the crypto market. Former CEO Michael Saylor showed excitement in May when the board confirmed that it would start to consider fair value accounting for the asset class.
“I can understand that the accounting under the intangible model doesn’t necessarily yield meaningful results,” said FASB Board Member Marsha Hunt at the time.
A Boon for Institutional Adoption
MicroStrategy’s new CEO and former CFO, Phong Le, told WSJ that the incumbent approach forced companies to prepare their financial statements in an inaccurate manner concerning Bitcoin.
“We expect the disconnect between the reported carrying value on our balance sheet and the fair market value of our bitcoin holdings to grow significantly over time,” he told FASB in a letter last year.
Deniz Appelbaum – assistant professor of accounting and finance at Montclair State University – said the fair value system could make companies less reluctant to add Bitcoin to their balance sheets. “Without these standards for the accounting and valuation of crypto assets, companies are reluctant to hold them,” she said.
Poor accounting rules were one of the ten roadblocks listed by Saylor in June that are supposedly keeping Bitcoin from reaching mainstream adoption. Others include the “fear and ignorance” surrounding the coin and its impact on the environment, and the lack of a Bitcoin spot ETF in the United States.