Bitcoin on the Balance Sheet Is an Accounting Headache for Tesla, Others

On Sunday, Mr. Musk said Tesla would resume bitcoin transactions when miners increase use of renewable energy sources. The price jumped over 6% from its Friday 5 p.m. ET level to trade at about $39,300 early Monday. He also said that Tesla had sold only about 10% of its bitcoin holdings earlier this year to confirm that the cryptocurrency “could be liquidated easily without moving market.”

Tesla had about $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 returns on our cash.”

Software developer

MicroStrategy Inc.

and a handful of other companies, including payment app provider

Square Inc.,

have made similar investments. Some have touted bitcoin as a store of value, or a more modern version of gold.

But companies holding bitcoin in their treasuries face an accounting risk: Because bitcoin and other digital assets are considered “indefinite-lived intangible assets,” rather than currencies, any decrease in their value below what the company paid for them—even a temporary one—can force a company to write down the value and take an impairment charge.

Such assets must be tested for impairment at least annually, or if the price falls below the company’s carrying value. The volatile nature of bitcoin makes quarterly revaluations routine. Once the company takes the charge, that resets the fair value of the asset. Conversely, if the price has gone up, the company can’t record a gain; it can do that only when it sells the asset.

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

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

“The accounting is a little bit incongruous with the underlying purpose,” she said.

Few other companies have been eager to jump into bitcoin. A February survey from research firm

Gartner

found only 5% of chief financial officers questioned planned to hold bitcoin as a corporate asset this year. Of the finance chiefs surveyed, 84% said they never planned to hold it.

Tesla initially disclosed a $1.5 billion investment in bitcoin on Feb. 8 but didn’t specify how many bitcoins it held or the average price it paid. The change to its investment policy, however, was made in January, and the price of bitcoin averaged about $35,400 between Jan. 1 and Feb. 8, according to data from CoinDesk. That means Tesla likely held around 37,000 bitcoins after slightly trimming its position in the first quarter.

As of Friday afternoon, bitcoin hovered just above $37,000, and it dropped as low as $30,202 last month.

It is likely Tesla will take an impairment charge on its bitcoin holdings this quarter, said Wedbush Securities analyst

Dan Ives.

He added that the company was likely buying across January and at least some of those holdings are now being held at a loss.

“If bitcoin is below $30,000, or in the low $30,000s [at the end of the second quarter], the impairment would have to be large,” he said. It could end up being similar in size to the $101 million gain Tesla posted in the first quarter on the sale of some of its holdings, he said.

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

Tesla’s results in recent periods have been propped up by one-time gains. In addition to the gain on the bitcoin sale in the first quarter, the company recorded a $518 million gain on the sale of regulatory credits to other auto makers to help them meet emissions mandates. That pushed the company into the black for the period—Tesla posted net income of $438 million, or 93 cents a share.

Tesla wouldn’t be the first company to take a big charge on its bitcoin holdings.

MicroStrategy, which sells business software and holds about 92,000 bitcoins worth more than $3 billion, already has posted quarterly losses because of this accounting treatment, both in last year’s third quarter and this year’s first.

Last week, it said it expects to take a charge of at least $285 million on its bitcoin investment in the current period, which will push it to another quarterly loss.

For now, MicroStrategy is just accepting the accounting practice, Chief Executive

Michael Saylor

said in an interview. He said he sees bitcoin as a better value than the U.S. dollar and has made buying and holding it as much of a company priority as software sales.

“This looks risky to a person who doesn’t understand bitcoin,” he said, “but it is by far the least risky way to grow the company.”

The company’s bitcoin strategy has made Mr. Saylor a hero in cryptocurrency circles but has also made MicroStrategy’s stock as volatile as bitcoin. The shares were trading at $135 last August when the company announced its new bitcoin strategy. They skyrocketed to a record $1,273 by September but have been falling since then, closing Friday at $516.44.

It is harder to determine how much Tesla’s stock price has been affected by its bitcoin strategy since it is a far smaller part of the company’s holdings, but the stock has been falling since the February announcement. It closed at $609.89 Friday, down 29% from Feb. 8.

Write to Paul Vigna at [email protected]