Bitcoin on the balance sheet is an accounting headache for Tesla and others

Elon Musk’s curious Twitter war with bitcoin expected to hit Tesla From Inc.

TSLA -0.04%

final result of this quarter.

Musk is widely accused by investors of starting the digital currency’s hardest drop of the year after announcing on Twitter that Tesla would stop accepting bitcoin as payment for its electric vehicles. He added fuel to the fire earlier this month, tweeting breakup memes with “#bitcoin” and a heartbroken emoji. Bitcoin has plunged 30% since the original tweet on May 12.

On Sunday, Musk said that Tesla would resume bitcoin transactions when miners increase their use of renewable energy sources. The price jumped more than 6% from its level on Friday at 5pm ET to trade around $ 39,300 early Monday. He also said that Tesla had sold only about 10% of its bitcoin holdings earlier this year to confirm that the cryptocurrency “could easily be liquidated without moving the market.”

Tesla had about $ 1.3 billion in bitcoins parked in its treasury at the end of the first quarter and announced the purchase of bitcoins in February to “diversify and maximize returns on our cash.”

MicroStrategy Software Developer INC.

and a handful of other companies, including payment app provider Square INC.,

have made similar investments. Some have touted bitcoin as a store of value or a more modern version of gold.

But companies that have bitcoins in their treasuries face an accounting risk: because they are considered bitcoins and other digital assets “Intangible assets with indefinite life”, Instead of currencies, any decrease in their value below what the company paid for them, even a temporary one, can force a company to write off the value and take an impairment charge.

Such assets must be tested for impairment at least once a year, or if the price falls below the company’s book value. The volatile nature of bitcoin makes quarterly revaluations routine. Once the company takes office, the fair value of the asset is restored. On the contrary, if the price has risen, the company cannot register a profit; You can only do this when you sell the asset.

Tesla, which did not respond to a request for comment, is projected to post a profit of 96 cents a share in the second quarter, according to analysts surveyed by FactSet.

Bitcoin’s volatility, combined with this accounting treatment, makes it difficult for corporate officials to manage cryptocurrency holdings as cash, making it less useful as a reserve asset, said Jennifer Stevens, an accounting professor at Ohio University.

“The accounting is a bit inconsistent with the underlying purpose,” he said.

Few other companies have been eager to jump into bitcoin. A February survey by research firm Gartner found that only 5% of surveyed CFOs planned to hold bitcoin as a corporate asset this year. Of the CFOs surveyed, 84% said they never planned to celebrate.

Bitcoin’s value has plummeted since Elon Musk said last month that Tesla would stop accepting cryptocurrency as payment for its electric vehicles.


Photo:

Michele tantussi / Reuters

Tesla initially disclosed a $ 1.5 billion investment in bitcoin on February 8, but did not specify how many bitcoins it had or the average price it paid. However, the change in their investment policy was made in January, and the price of bitcoin averaged around $ 35,400 between January 1 and February 8, according to data from CoinDesk. That means Tesla likely had around 37,000 bitcoins after slightly cutting its position in the first quarter.

As of Friday afternoon, bitcoin held just above $ 37,000 and dropped to $ 30,202 last month.

Tesla is likely to take an impairment charge on its bitcoin holdings this quarter, Wedbush Securities analyst Dan Ives said. He added that the company is likely to be buying in January and that at least some of those stakes are now held at a loss.

If bitcoin is below $ 30,000, or below $ 30,000 [at the end of the second quarter], the deterioration would have to be great ”, he said. It could end up being similar in size to the $ 101 million profit Tesla made in the first quarter from the sale of some of its stakes, he said.

“It went from a tailwind to a real headwind,” he said.

Tesla’s results in recent periods have been supported by one-off gains. In addition to the gain on bitcoin sales in the first quarter, the company posted a $ 518 million gain on the sale of regulatory credits to other automakers to help them meet emissions mandates. That pushed the company into negative numbers for the period: Tesla posted net income of $ 438 million, or 93 cents a share.

Tesla wouldn’t be the first company to take a heavy toll on its bitcoin holdings.

MicroStrategy, which sells business software and has about 92,000 bitcoins worth more than $ 3 billion, has already posted quarterly losses due to this accounting treatment, both in the third quarter of last year and in the first of this year.

Last week, he said that he expects to take over at least $ 285 million in his bitcoin investment in the current period, leading him to another quarterly loss.

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For now, MicroStrategy is simply embracing accounting practice, Chief Executive Michael Saylor said in an interview. He said he sees bitcoin as a better value than the US dollar and has made buying and holding it a company priority as much as software sales.

“This seems risky to a person who doesn’t understand bitcoin,” he said, “but it is by far the least risky way to grow the business.”

The company’s bitcoin strategy has made Saylor a hero in cryptocurrency circles, but it has also made MicroStrategy’s stock just as volatile as bitcoin. The stock was trading at $ 135 last August when the company announced its new bitcoin strategy. They shot to a record high of $ 1,273 in September, but have been falling since then, closing at $ 516.44 on Friday.

It is more difficult to determine how much Tesla’s share price has been affected by its bitcoin strategy, as it is a much smaller part of the company’s holdings, but the shares have been falling since the February announcement. It closed at $ 609.89 on Friday, down 29% from February 8.

Bitcoin, Dogecoin, Ethereum: cryptocurrency markets

Write to Paul Vignes at [email protected]

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