Sale of BTC by Tesla: These accounting rules which make the result of the sale uncertain!





“The only thing that is certain is death and taxes. This idiom may be overused, but adding a third item to this list is usually pretty nifty.

For example, my editor would probably say, “The only sure thing is death, taxes, and a lot of misplaced commas that I have to edit.” My favorite personal use comes from The Roots’ Tariq “Black Thought” Trotter freestyle where he says, “The only certain thing is taxes, death and trouble. »

This week, we’ll be looking at the less common version of that phrase: “The only thing that’s certain is death, taxes, and a whole bunch of aberrant accounting rules governing the treatment of digital assets on corporate balance sheets.” , leading to a misrepresentation of corporate earnings. »

That’s right, we’re talking about US accounting rules this week. And just at the right time, Tesla announced last Wednesday that it sold 75% of its bitcoins in the second quarter. So let’s dive into the heart of the matter.

That (and maybe more…) below.

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Unfortunately, we first have to delve into the story everyone was talking about on Wednesday, in order to establish a clear transition to our main accounting topic. It involves Tesla’s sale of bitcoin (BTC) worth $936 million, which made up about 75% of its holdings.

Even more regrettable, I kind of come to the defense of Tesla. Companies are people too!

Contrary to what most internet users would have you believe, Tesla did not “re-paper” the bitcoins it bought at a loss last year. Excerpt from Tesla’s second quarter earnings call:

“In addition, we converted a majority of our bitcoin holdings to fiat for a realized gain, offset by impairment charges on the rest of our holdings, representing a net cost of $106 million to the [compte de résultat]. »

I don’t know if you know this, but a realized gain means that Tesla has realized a gain. And to make a profit, you have to sell something for a higher price than you bought it. Otherwise, it would be a realized loss.

And when you realize she made those sales between April and June 2022, that’s where it gets a little interesting. For context, here is the price of bitcoin from April 1 to June 30, 2022

Bitcoin opened the quarter around $45,000 and ended it below $20,000. Somewhere in this period, in the midst of a large number of sales, Tesla dumped around 30,000 BTC. The Luna Guard foundation also sold around 80,000 BTC during the UST/LUNA fatal spiral. That’s a lot of cash for the bitcoin market to absorb, and while it gave away 58% of its market cap, it didn’t give away 100% (a low bar, I know, but still).

Before we dive into the accounting rules, we need to explain why Tesla sold its bitcoins. From the same benefit call:

“We didn’t know when the COVID lockdowns in China were going to ease, so we sold bitcoins to bolster our cash flow. »

Tesla’s most recent bitcoin sale is certainly not a criticism of bitcoin. When Tesla sold bitcoin last April, it did so to “test liquidity.” Now, in the second quarter, when it needed cash, there was ample cash to provide that cash. So even though bitcoin was called a “sideshow of a sideshow” during the conference call, the Tesla CEO added that “we are certainly open to the idea of ​​increasing our bitcoin holdings in the future. ‘coming “.

Tesla isn’t in the bitcoin business, and neither are most companies. But, if these companies choose, bitcoin can appear on balance sheets and serve as a cash asset for cash management. Part of cash management is moving in and out of different assets based on changing business needs.

Tesla, and other companies, will come back to the charge in due course.

These flawed accounting rules governing digital assets

I promised to address some unsubstantiated accounting rules, so I will because they are quite important. This also corresponds to my general opinion that “to enter into stock Exchange is stupid” and “infinite growth is not only impossible, but also bad”.

Currently, bitcoin is considered an intangible asset with an indefinite life. This means that companies that hold bitcoins on their balance sheets must depreciate in value if the price of bitcoins goes down. See the article: Binance Coin (BNB) is bouncing off the $300 support and looking to challenge $360.. This is sensible and gives an accurate representation of the financial reality that the asset they hold is now worth less.

Unfortunately, since bitcoin is considered an intangible asset with an indefinite life, the company is not allowed to increase the value of bitcoin to accurately represent the financial reality that the asset it holds now has a higher value. Mark-to-market assets, on the other hand, allow companies to adjust the value of an asset to reflect its value as determined by current market conditions. If bitcoin were allowed to be treated as a mark-to-market asset, companies could.

The rule that requires bitcoin to be treated as an intangible asset with an indefinite life is determined by the Financial Accounting Standards Board (FASB) in the United States.

First, it makes sense. Indefinite-lived intangible assets include things like goodwill, an invented asset that allows acquiring companies to overpay a target. Goodwill does not trade in a liquid market, but bitcoin does. Valuation of goodwill at market is practically impossible; valuing bitcoin at the market is easy.

And second, it would give a more accurate picture of the financial situation of companies. US public companies are already heavily burdened with providing quarterly financial reports to shareholders. If these companies hold bitcoins that are depreciated one quarter and not allowed to be valued the next quarter, this will give an inaccurate representation of the company’s financial condition without additional information from the company.

On this subject, we should return to Tesla. Recall that she converted the majority of her bitcoin holdings at a gain offset by “impairment charges on the rest of our holdings, a cost of $106 million to the [compte de résultat] “. So Tesla’s income statement doesn’t show the bitcoin sale that made money (which is normal; it shows up in the cash flow statement), but it does show a bitcoin-related loss that he did not sell. It does not mean anything.

In the spirit of…ahem…making sense, maybe we should start treating bitcoin like the mark-to-market asset that it is.

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Thomas E.
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