Here’s why Bitcoin could be an accounting headache on the balance sheet

Elon Musk’s strange Twitter war with Bitcoin is expected to be Tesla Inc.’s bottom line this quarter.

Musk is widely blamed by investors for sparking the toughest digital currency slide of the year after announcing on Twitter that Tesla would no longer accept bitcoins as payment for its electric vehicles. He added fuel to the fire earlier this month and tweeted breakup memes with “#bitcoin” and a broken heart emoji. Bitcoin has plummeted 30% since the original May 12 tweet.

On Sunday June 13, Musk said Tesla would resume Bitcoin transactions if miners increase their use of renewable energy sources. The price jumped over 6% from its 5:00 p.m. ET Friday and was trading at around $ 39,300 on June 14. He also said that Tesla only sold about 10% of its Bitcoin holdings earlier this year to confirm that the cryptocurrency could “easily be liquidated without moving the market.”

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

Software developer MicroStrategy and a handful of other companies, including payment app provider Square, have made similar investments. Some have touted Bitcoin as a store of value or a more modern version of gold.

However, companies that keep Bitcoin in their coffers are exposed to an accounting risk: Since Bitcoin and other digital assets are considered “intangible assets with an indefinite life” rather than currencies, any depreciation in value below the value paid by the company, even temporarily. take place. can force a company to write off its value and make an impairment loss.

These assets must be tested for impairment at least annually or if they fall below the book value of the company. Bitcoin’s volatility makes quarterly revaluations a routine. Once the company takes on the burden, the asset’s fair value is reset. Conversely, if the price has risen, the company cannot make a profit; he can only do this if he sells the asset.

Tesla, which didn’t respond to a request for comment, will post earnings of 96 cents per share in the second quarter, according to analysts polled by FactSet.

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

“The bookkeeping is a bit in line with the underlying purpose,” she said.

Few other companies were eager to get into Bitcoin. A survey by market research firm Gartner in February found that only 5% of the finance directors surveyed planned to keep Bitcoin as a company asset this year. Of the CFOs surveyed, 84% said they never intended to keep it.

Tesla initially made an investment of $ 1.5 billion on Feb. 8, but the investment policy change was made in January and Bitcoin’s price averaged between Jan 1 and Feb 8, according to CoinDesk $ 35,400. That means Tesla likely held around 37,000 bitcoins after trimming its position slightly in the first quarter.

On Friday afternoon June 11, Bitcoin hovered just above $ 37,000 and fell to $ 30,202 last month.

It is likely that Tesla will write a write-down on its Bitcoin holdings this quarter, said Dan Ives, an analyst with Wedbush Securities. He added that the company likely bought in January and at least some of those holdings are now being held at a loss.

“When Bitcoin is below $ 30,000 or in the lower range of $ 30,000 [at the end of the second quarter], the impairment should be great, ”he said. It could end up being about as big as the $ 101 million Tesla profit made in the first quarter from selling some of its holdings, he said.

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

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Tesla’s results for the past few periods were supported by one-time gains. In addition to the profit on Bitcoin sales in the first quarter, the company posted a profit of 518 million, which put the company in the black for the period – Tesla posted net income of $ 438 million, or 93 cents per share.

Tesla wouldn’t be the first company to heavily bill its Bitcoin holdings.

MicroStrategy, which sells enterprise software and sells around 92,000 bitcoins valued at more than $ 3 billion

Last week it announced that there were at least 285 million euros in the current period.

At the moment, MicroStrategy only accepts 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 bitcoin a business priority as well as selling software.

“This looks risky to a person who doesn’t understand Bitcoin,” he said, “but it’s 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 as volatile as Bitcoin. Shares were trading at $ 135 last August when the company announced its new Bitcoin strategy. They rose to a record $ 1,273 by September, but have fallen since then, closing at $ 516.44 on June 11.

It’s harder to determine how much Tesla’s share price has been affected by its Bitcoin strategy, given that it’s a far smaller fraction of the company’s holdings, but the stock has fallen since the February announcement. It closed at $ 609.89 on Friday, 29% down on February 8th.

Write to Paul Vigna at paul.vigna@wsj.com

This article was published by Dow Jones Newswires

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