Accounting Rules Make the Outcome of Tesla’s Bitcoin Sale Unclear

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“The only thing that’s certain is death and taxes.” This idiom could also be overused, however including a 3rd merchandise to that listing is often fairly intelligent.

For instance, my editor would most likely say: “The only thing that’s certain is death, taxes and a lot of misplaced commas that I have to edit out.” My private favourite use comes from The Roots’ Tariq “Black Thought” Trotter’s freestyle the place he says: “The only thing for sure is taxes, death and trouble.”

This week we’ll dive into the less-commonly used model of this phrase: “The only thing that’s certain is death, taxes and a whole bunch of off-base accounting rules governing the treatment of digital assets on corporate balance sheets leading to a misrepresentation of corporate earnings.”

That’s proper, we’re speaking about U.S. accounting guidelines this week. And proper on cue, Tesla announced last Wednesday that it bought 75% of its bitcoin in the second quarter. So let’s dive in.

That (and possibly extra …) beneath.

George Kaloudis

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Regrettably, we are going to first must dive into the story everybody was squawking about on Wednesday in order that we are able to cleanly arrange a transition to our primary accounting subject. That story is Tesla promoting $936 million worth of bitcoin (BTC), which made up roughly 75% of its holdings.

Even extra regrettably, I’m sorta kinda coming to the protection of Tesla. Corporations are people too!

So it goes.

‘I would pump, however I don’t dump’

Unlike what most of the web desires you to consider, Tesla did not “paper hand” the bitcoin it bought last year for a loss. From Tesla’s second quarter earnings call:

“Additionally, we converted a majority of our bitcoin holdings to fiat for a realized gain offset by impairment charges on the remainder of our holdings, netting a $106 million cost to the [income statement].”

Not positive if you happen to understand this, however a realized achieve means Tesla realized a achieve. And to understand a achieve, it’s a must to promote one thing for greater than you got it for. Otherwise, it will be a realized loss.

And whenever you understand that it made these gross sales someday between April and June 2022, that’s when it will get a little bit fascinating. For context, right here is the worth of bitcoin from April 1 to June 30, 2022

Bitcoin opened the quarter buying and selling round $45,000 and ended it beneath $20,000. Somewhere in there, amid loads of promoting, is Tesla unloading some ~30,000 BTC. Also featured on this timeframe is the Luna Foundation Guard selling ~80,000 BTC throughout the UST/LUNA death spiral. That’s loads of liquidity for the bitcoin market to take in, and whereas it did cede 58% of its market capitalization, it didn’t cede 100% of it (a low bar, I do know, however nonetheless).

Before we are able to dive into accounting guidelines, we have to spotlight why Tesla bought any of its bitcoin in any respect. From the similar earnings name:

“We were uncertain when the COVID lockdowns in China would alleviate so we sold bitcoin to bolster our cash position.”

Tesla’s most up-to-date bitcoin sale is definitely not a critique of bitcoin. When Tesla bought some bitcoin last April it did so to “test liquidity.” Now, in the second quarter, when it wanted money, there was ample liquidity to produce that money. So although bitcoin was known as a “sideshow to a sideshow” on the name, Tesla’s CEO added that “we are certainly open to increasing our bitcoin holdings in the future.”

Tesla isn’t in the bitcoin enterprise, and neither are most corporations. But hey, bitcoin can sit on steadiness sheets and act as a treasury asset for cash management if these corporations so select. Part of money administration means transferring out and in of completely different belongings as the wants of the enterprise evolve.

Tesla, and different corporations, will likely be again for extra in due time.

Those off-base accounting guidelines governing digital belongings

I promised to cowl some off-base accounting guidelines, so I’ll as a result of they’re considerably essential. It additionally aligns with my common view that “going public is dumb” and that “infinite growth is not only impossible, but bad.”

I’ll hold it temporary.

Right now, bitcoin is handled as an indefinite-lived intangible asset. That means the corporations that maintain bitcoin on their steadiness sheets have to mark down its steadiness sheet worth if bitcoin’s worth decreases. This is wise and provides an correct illustration of the monetary actuality that the asset it holds is now value much less.

Unfortunately, as a result of bitcoin is handled as an indefinite-lived intangible asset, the firm isn’t allowed to extend the worth of the bitcoin to precisely signify the monetary actuality that the asset it holds is now value extra. Mark-to-market assets, in distinction, enable corporations to regulate the worth of an asset to mirror its worth as decided by present market circumstances. If bitcoin have been allowed to be handled as a mark-to-market asset, corporations may do that.

The rule that requires bitcoin to be handled as an indefinite-lived intangible asset is decided by the Financial Accounting Standards Board (FASB) in the U.S. And they need to change the rule for 2 causes.

First, it is smart. Indefinite-lived intangible belongings embody issues like goodwill, a made-up asset that enables buying corporations to overpay for a goal. Goodwill doesn’t trade on any kind of liquid market, however bitcoin does. Marking goodwill to market is mainly unattainable; marking bitcoin to market is simple.

And second, it will give a extra correct illustration of corporations’ monetary positions. Public corporations in the U.S. are already onerously tasked with offering quarterly monetary reviews to shareholders. If these corporations maintain bitcoin that’s impaired one quarter and never allowed to be marked up the subsequent, that may give an inaccurate illustration of the firm’s monetary place with out further info from the firm.

To that time, we must always convey it again to Tesla. Remember it transformed a majority of its bitcoin holdings for a achieve offset by “impairment charges on the remainder of our holdings netting a $106 million cost to the [income statement].” So Tesla’s revenue assertion doesn’t present the sale of bitcoin that made money (which is regular; it reveals up on the cash flow statement), nevertheless it does present an revenue assertion loss related to bitcoin it didn’t promote. That is unnecessary.

In the spirit of … ahem … making sense, maybe we must always begin treating bitcoin like the mark-to-market asset it’s.

The views and opinions expressed herein are the views and opinions of the creator and don’t essentially mirror these of Nasdaq, Inc.





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