MicroStrategy: Accounting for Cryptocurrency Case Faculty & Research Harvard Business School

• 12 nov, 2020
• Bookkeeping

They also considered whether to provide implementation guidance relative to the application of fair value measurement of crypto assets, but here too they decided not to provide additional measurement guidance as part of this project. In addition, they considered whether there should be a difference for private cryptocurrency accounting companies for the measurement of crypto assets and decided that the measurement and recognition requirements should be the same for all entities. Given the highly volatile market with which bitcoin operates, does the current method of accounting provide an accurate picture of a company’s balance sheet?

On the surface, it appears to be the simplest method to account for cryptocurrency, but there are several issues with it. Unfortunately, you can’t account for a cryptocurrency using the same criteria that apply to cash or cash equivalents.

Will there be occasions when your financial statements and reporting for tax purposes don’t align?

It remains unclear as to exactly how ASC 820 will impact accounting for digital asset holdings. However, the general concept posits that an appreciation in price would be accounted for on the balance sheet at current market value based on the date of the relevant financial statement reporting period. Furthermore, companies would begin to see benefits on their income statement when an increase in the price of their holdings exceeds the purchase price, representing a gain . Companies were — and still are — encouraged to account for these holdings under ASC 350 at their cost basis, subject to impairment, all the while neglecting subsequent increases in fair value. Put simply, organizations were guided to account for these assets at their purchase price on the balance sheet while only a decrease in value below the initial cost of the holdings were to be recognized as a loss on the income statement! Perversely, increases in price and value were to be ignored on both the balance sheet and income statement.

This addition came in response to feedback received regarding agenda priorities. This poses some challenges though, as under intangible asset accounting, a cryptocurrency is accounted for at cost and is subject to impairment testing.

Cryptocurrency explained

Computer cryptographer Satoshi Nakamoto coinvented the currency, and then disappeared three years later. No one knows who Nakamoto is — a man, a woman, or a group — but Bitcoin established the principles that all cryptocurrencies are based on today. Therefore, it’s more appropriate to consider these Digital Assets non-core when calculating Enterprise Value, similar to the treatment for cash and financial investments. My goal here is to address some of the accounting and valuation issues that come up when companies adopt crypto.

It may be a difficult leap at this point to get agreement that cryptocurrency is a true currency, but from a practical standpoint, I would support this treatment as an option. Crypto tokens and cryptographic assets may be best treated under IFRS 9, classified as ‘Financial Instruments’ or financial assets.