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The decision by the FASB to allow fair-value accounting for digital assets is a huge step forward for companies like MicroStrategy.
Software developer MicroStrategy Inc (NASDAQ: MSTR) is set to report its Bitcoin (BTC) holdings quarterly without recognizing impairment losses in case of crypto price declines during the reporting period. This development comes as a result of the Financial Accounting Standards Board (FASB) approving new guidelines.
Berenberg, a respected investment bank, has brought attention to this development as reported by Coindesk, suggesting that it could be a game-changer for MicroStrategy and other companies with substantial BTC holdings.
Microstrategy’s Impairment Dilemma
MicroStrategy’s foray into Bitcoin began with an ambitious goal to devote a significant amount of its treasury reserves to the cryptocurrency. While this strategy has gained admiration for its pioneering spirit, it has also exposed the company to the inherent volatility of the crypto market.
According to the report, MicroStrategy has reported cumulative impairment losses of $2.23 billion since adopting its Bitcoin acquisition strategy in August 2020. The most significant of these losses, amounting to $917.8 million, was recorded in the second quarter of 2022.
This massive loss became the focal point of news coverage of MicroStrategy’s earnings, creating an impression that the company’s intrinsic value had been severely impacted, despite this not being the case.
Berenberg’s report highlights the disconnect between MicroStrategy’s true financial position and the perception created by impairment losses. This disconnect can be attributed to the traditional accounting standards that require companies to recognize impairment losses when the market value of an asset, such as Bitcoin, falls below its carrying value.
The recent decision by FASB to allow companies like MicroStrategy to report their Bitcoin holdings quarterly without recognizing impairment losses during short-term price fluctuations addresses this issue directly.
This means that MicroStrategy and similar companies can now report the fair value of their Bitcoin holdings at the end of each fiscal quarter, providing a clearer picture of their financial health.
Immediate Impact and Adoption Timeline of FASB’s New Rules
The decision by the FASB to allow fair-value accounting for digital assets is a huge step forward for companies like MicroStrategy. MicroStrategy’s executive chairman, Michael Saylor, praised the regulatory change, saying it “eliminates a major impediment to corporate adoption of Bitcoin as a treasury asset.” This demonstrates the significance of the change in promoting the widespread adoption of cryptocurrencies inside the corporate sector.
While the official implementation of the new rules is expected in 2025, companies will have the option to adopt them earlier. Berenberg’s report suggests that MicroStrategy plans to exercise this option, indicating the company’s eagerness to align with the latest accounting standards and take advantage of the benefits it offers.
Meanwhile, Berenberg maintains a positive outlook on MicroStrategy. The bank has a buy rating on MicroStrategy shares, with a price target of $510. As of the latest available data, MicroStrategy’s stock closed at $353.07 on Thursday, reflecting investor interest in the company’s future prospects.