Good Sunday dear Readers,
under the lens of FASB regulations, let’s dissect the impact of ASC 820’s guidance on companies that have digital assets/crypto assets on their balance sheets and are preparing for financial filings.
The FASB’s recent issuance, ASU 2023-08, marks a significant shift in the accounting landscape for digital assets, requiring entities to measure certain crypto assets at fair value, with changes in fair value reflected in net income each reporting period. This guidance enhances transparency and provides investors with more decision-useful information that better reflects the underlying economics of crypto asset transactions.
For companies like MicroStrategy, which has a substantial investment in digital assets, this change is monumental. Previously, entities might have accounted for these assets as indefinite-lived intangible assets, measured at historical cost less impairment. Now, the requirement to measure at fair value and report changes in net income emphasizes the volatile nature of these assets and could lead to significant fluctuations in reported earnings.
The scope of ASU 2023-08 excludes wrapped tokens and assets created or issued by the reporting entity or its related parties, focusing instead on crypto assets that satisfy certain criteria, including being fungible and residing on a blockchain or similar technology. This nuanced approach acknowledges the diverse nature of digital assets and aims to provide a more accurate reflection of their value.
For MicroStrategy, a company that holds a significant amount of Bitcoin, the new guidance could lead to more pronounced volatility in its financial statements. The company’s strategy, heavily centered around its Bitcoin holdings, will now be under greater scrutiny as the fair value measurements could introduce earnings volatility reflective of the crypto market’s fluctuations.
Regarding MicroStrategy’s treasury strategy, it has been aggressively acquiring Bitcoin, viewing it as a superior asset compared to holding cash in inflationary environments. This bold move has placed MicroStrategy at the forefront of corporate investment in digital assets, making its financial filings a bellwether for assessing the corporate adoption of crypto assets.
It will indeed be fascinating when MicroStrategy releases its financials. I would be hesitant to short its stock right now, especially given the proximity to the Bitcoin halving, which could significantly impact Bitcoin’s, and consequently MicroStrategy’s, future prospects positively.
By providing a fair value measurement for digital assets, FASB’s guidance under ASC 820 brings a new layer of transparency and complexity to financial reporting, particularly for companies like MicroStrategy. The changes underscore the importance of understanding the volatile nature of digital assets and the impact they can have on a company’s financial health.
I recently had a conversation with a colleague who compared MicroStrategy to CMGI Inc. from the late ’90s. CMGI Inc. served as an incubator, bringing companies in the internet sector to the public market through IPOs at their inception.
When CMGI went public in 1994 at $8, its stock price quickly rose to $17. By 1998, after adjustments for splits, the stock was at $219, in 1999 it reached $2,453, and by 2000, just before the burst of the New Economy Bubble, it was valued at $11,195. He mentioned that Bitcoin does not represent a bubble and suggested that we might be witnessing the birth of a new era’s Berkshire Hathaway with MicroStrategy.
You’ll soon find out who I was speaking with, as he plans to share some insights from his extensive experience in the near future.
Have a wonderful Sunday.
Best regards, Denise
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