Last week, the most bullish Bitcoin regulatory event in 2022 so far took place, and it flew under the radar of many bitcoiners.
2/ The Financial Accounting Standards Board (FASB) decided to require companies to measure cryptocurrency assets at fair value. This is extremely bullish. Who? What? Why? So what? read on 👇
3/ first the who. The FASB in the US is a federal regulatory agency that establishes the standards for financial reporting in the US.
Those standards are known as "generally accepted acounting principles," or GAAP for short. What are these standards?
4/ They are created to ensure accurate and acceptable accounting practices & provide transparent information for investors and are meant to help prevent accounting fraud. They also ensure that an investor can look at a company's P&L and *quickly* judge the health of the business
5/ Every publicly traded company has to follow GAAP accounting, and their GAAP-abiding P&Ls are generally published quarterly.
Cool, cool, so what's this got to do with Bitcoin ? For publicly traded companies wanting to hold BTC on their balance sheets, like @MicroStrategy ...
6/ ...up until last week, the accounting treatment for Bitcoin was to classify it as an "indefinite intangible". Translation please? From an accounting pov, these assets are to be valued at the lowest value market bid during the time period of your ownership😵. But that's not all
7/ indefinite intangibles also get accounted for in a unique way: they are not classified as investments.
When their value declines, according to GAAP standards, they were (prior to last week) treated as an operating loss to the core business. How big of a problem was this?
8/ In an interview last year, @saylor gave an example: Imagine you have a business that makes 100MM/year, but in that year you bought bitcoin and it trades down for an hour then comes back up, you'd GAAP report that year as an operating loss, even though your business is A-OK.
9/ So now as an outside investor looking at such a company, you'd have to dig deep to understand why a business that is actually running perfectly well to produce a sustainable profit, yet shows an operating loss.
OR In reality what most investors do is: see negative, stay away.
10/ The theoretical worst case that indefinite intangible accounting is meant to capture is if you sell the bitcoin at the absolute lowest possible price that year, even if you don't actually do that, and account for it as if you have. Talk about a hurdle for adoption!
11/ To put a bow on this, let's work out an example with some math: if your company buys 1MM worth of bitcoin,
it trades down to 500k, then back up to say 2MM that same year, and you don't sell it, you're just hodling, your P&L would reflect a 500k loss for the year 😱
12/ Prior to last week's announcement, the only option facing such companies was to create pro-forma P&Ls which are non-GAAP P&Ls, where you would line by line show that it is not in fact an operating loss. There are 2 issues however with that approach:
13/ 1. You've made an investor's life 100x harder. They now have to read all this additional explanation to figure out what's happening and 2. Your P&L statements are non-comparable over time and when attempting to compare companies to each other.
14/ because of this, as @mcshane_writes put it:
"MicroStrategy recently [in 2021] wrote to the FASB, 'This disconnect between an entity’s financial statements and the economic reality of its financial condition and results of operations creates confusion and fails to...
15/ ... provide investors, analysts, and the general public with the information they need to make an informed assessment of an entity’s current and future prospects.'” you can read more on the condition a year ago here h/t @BitcoinMagazine
so now what?
16/ with last week's FASB decision, companies can now use fair-value accounting for Bitcoin. This would allow companies to report losses *and gains* **immediately** and treat bitcoin and 💩coins as traditional financial assets; no longer like indefinite intangible assets.
17/ Unlike indefinite intangible asset rules, fair-value accounting uses CURENT market values as the basis for recognizing assets and liabilities. This removes the undue burden and accounting nightmare described above of companies wanting to hold bitcoin on their balance sheets.
18/ It's no wonder then that @saylor is praising this development:
19/ With this development, we should expect to see more organizations, who have perhaps been on the fence about adding Bitcoin to their balance sheet have 1 less hurdle removed from their path to do so.
This. Is. Bullish.
But for now, let's keep stacking before they come.
20/end We hope you've enjoyed this thread. If you've learned something here, like and retweet this nested tweet to help us spread the knowledge. 😊🙏🏽 We also cover a lot of these types of topics in our weekly newsletter. This week's comes out tomorrow and it is 🔥. Link in bio!This post is based on this twitter thread.