Bitcoin – No More Tangible in Account Books

Hello everyone, Welcome back to another blog.

The topic of this blog is very interesting. I was watching a podcast featuring an accountant from the USA, and he mentioned something really cool. So, I did my research on it and found it quite interesting. This could potentially drive the price of Bitcoin to the next level.

Let’s first understand this in simple words:

For companies, until now, Bitcoin has been treated as an intangible asset. This means when a company bought Bitcoin, it was recorded on the balance sheet at the purchase price—or, in trading terms, the Entry Price.

The frustrating thing about this rule was that if the value of the asset increased, it wasn’t recognized. However, if the price decreased, the valuation had to be lowered.

In simple terms, if you were in profit, you couldn’t show it in the books, but if the price dropped and you were in a loss, you had to record it in the books as an expense on the company’s income statement.

Even if the price of Bitcoin later recovered or rose above the original purchase price, the company could not reverse the impairment charge. The Bitcoin would continue to be valued on the balance sheet at the lower impaired value until it was sold.

Example:

MicroStrategy owns 252,220 bitcoins, with an average purchase price of $39,266 per Bitcoin. Based on the current Bitcoin price of $97,000, the company is in a 147% profit. In figures, the company is almost $14.5 billion in profit, with a total valuation of around $24.4 billion.

But here’s the silly part: on the balance sheet, the total valuation is still shown as $9.9 billion, based on the buying price.

I guess now you understand how frustrating this is for companies. This was also one of the reasons why major companies weren’t keen on investing in Bitcoin and other cryptocurrencies.

Recognizing the need for more accurate financial reporting, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2023-08 in December 2023. This update mandates that certain crypto assets be measured at fair value, with changes in fair value recognized in net income during each reporting period. This approach will take into account crypto assets and their market dynamics, providing a more transparent view of a company’s financial position.

The new guidance is effective for fiscal years beginning after December 15, 2024, including interim periods within those years. Early adoption is permitted, allowing companies to implement these changes before the mandatory effective date.

The New Rules: Fair Value Accounting

Starting in January 2025, the new accounting standard allows companies to report their cryptocurrency holdings at fair value, meaning the current market price. Here’s how it works:

Key Changes

1. No More Impairment Charges: Companies no longer need to record losses for temporary price dips.
2. Market Value Gains: Fluctuations in Bitcoin’s price will now be reflected in financial statements as gains or losses, providing an accurate picture of the asset’s worth.
3. Transparency: Investors can see real-time valuations of a company’s Bitcoin holdings, fostering greater trust and understanding.

Example:

• A company buys 10 Bitcoin at $30,000 per BTC (total $300,000).
• Bitcoin’s price drops to $25,000: The books reflect the new value of $250,000, but there’s no impairment charge.
• Bitcoin’s price rises to $40,000: The books update to show the current market value of $400,000, and the increase is recognized as a gain.

This approach aligns accounting practices with the realities of cryptocurrency markets and removes the penalty for Bitcoin’s volatility.

How It Benefits Bitcoin and Crypto

1. Encouraging Adoption: Without the fear of impairment charges, more companies might invest in Bitcoin as a treasury asset.
2. Transparent Reporting: Investors and stakeholders will see accurate values for Bitcoin, building trust in companies’ financial health.
3. Mainstream Appeal: Companies may start viewing Bitcoin as a legitimate alternative to cash or gold.

I know the topic is a little bit technical but I thought you guys should know about it because it will affect the price of Bitcoin and the whole crypto market in the long term. What do you guys think? Let me know in the comments!