Microstrategy used improper accounting practices on Bitcoin holdings, SEC rules as stock drops 18%

  • The SEC has ruled that Microstrategy used improper accounting practices by stripping out the wild BTC price swings from its unofficial accounting practices.
  • The company has been trying for over a year to have U.S authorities change the way they handle BTC in accounting for publicly-listed firms.

Microstrategy violated the accounting guidelines set by the U.S Securities and Exchange Commission for its Bitcoin purchases, the regulator has ruled. According to the SEC, the company used accounting principles that failed to show the effects of the volatility of its Bitcoin stash.

As Bloomberg Tax reports, the SEC said in a comment letter that Microstrategy used non-GAAP (Generally Accepted Accounting Principles) accounting principles. GAAP refers to a common set of accounting standards and procedures issued by the Financial Accounting Standards Board that publicly-traded companies in the U.S must adhere to.

The SEC noted in its comments that Microstrategy had used the non-GAAP principles for its Form 10-Q for the quarterly period ended September 30 last year to show shareholders what its income would have been if it wasn’t for its stash of the volatile cryptocurrency.

We note your response to prior comment 5 and we object to your adjustment for bitcoin impairment charges in your non-GAAP measures. Please revise to remove this adjustment in future filings.

The agency also reminded the business intelligence software firm that “the company and its management are responsible for the accuracy and adequacy of their disclosures, notwithstanding any review, comments, action or absence of action by the staff.”

GAAP offers no guidance for cryptocurrencies, leaving companies with significant BTC holdings like Microstrategy and Tesla with little to work with.

The only guidance offered thus far is from the American Institute of CPAs which says that firms should consider Bitcoin an intangible asset. This means that for firms like Microstrategy, which are not investment firms, BTC should be recorded at its historical price when purchasing and only adjust if the value drops.

For instance, if BTC drops from $60,000 to $40,000, the firm’s accounting must reflect this. However, if BTC then shoots up to $70,000, the firm can’t update its asset value upwards.

In its defense, Microstrategy told the SEC last year that it uses non-GAAP accounting principles to give its investors a more complete picture of its performance. If it only shows a decline in BTC value, as is required, the data will be “less meaningful” to investors, especially since it has made Bitcoin central to its strategy.

It added:

We further believe that the inclusion of bitcoin non-cash impairment losses may otherwise distract from our investors’ analysis of the operating results of our enterprise software analytics business.

Related: El Salvador’s Bitcoin stash registers $12M loss while Microstrategy’s marks a 44% gain

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Steve has been a blockchain writer for four years, and a crypto enthusiast for even longer. He is most excited by the application of blockchain to solve the challenges facing developing nations.

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