SEC Refuses MicroStrategy Account Approach

[TL;DR]

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MicroStrategy is a software company that has converted into a Bitcoin hoarding corporation in the past two years. MicroStrategy has however been neglecting Bitcoin volatility in their financial statements, due to the significant declines Bitcoin has been experiencing in recent days, thereby using guidelines not defined under the US generally accepted accounting standards, i.e. non-GAAP measures.

This MicroStrategy's accounting technique, which eliminates "the impact of stock compensation charges, impairments, and gains on the sale of Bitcoin," was consequently rejected by the US Securities and Exchange Commission (SEC), while insisting that the adjustment should be removed in future filings. Keep reading to get the context of the situation!

Why did SEC reject the Microstrategy accounting approach?

Michael Saylor’s MicroStrategy has recently been demanded by the SEC (Security and exchange commission)
to adjust the accounting method used for valuing Bitcoin in their last income report.

Although a sum of 124,391 BTC was accumulated by the Bitcoin hoarding software company at the end of 2021 which was approximately $4.5 billion, the crack in the crypto market eventually sank the shares down as much as 18% ($375.89 /share), which continues to decline in after-hours trading. Bitcoin's price has also continued to face a downward loop. Over the past week, it has declined almost below $36k, losing over 45% of its value, and while this is no good news for MicroStrategy Inc, the firm also thinks that including cumulative Bitcoin impairment loss in financial statements is unfair to investors.

MicroStrategy subsequently resulted in using the "Non-GAAP measure" in their financial report to the SEC, this measure, however, doesn't concur with "the U.S. generally accepted accounting principles, GAAP. " The firm chose to evaluate the value of its Bitcoin holdings according to its market price at "4:00 pm Eastern Time on the last day of each period," totally bypassing the GAAP standard, i.e showing what the firm's income would have been in the Bitcoin holdings were not subjected to impairments, therefore “excluding Bitcoin impairment losses to better enable a comparison” of the firm's income variation across reporting periods.

Standard accounting principles, or "GAAP," is one of the ways used to calculate a company's earnings.

The established standard is to register an asset at its current value but to change it if its value decreases. In contrast to this "impairment adjustment," if the asset's value rises, it should not be reflected in the income statement until it is sold.

Basically, GAAP states that an impairment loss adjustment should be recorded as a loss in an income report. In practice, this implies that MicroStrategy's Bitcoin holdings should account for a dip, and must neglect every "rise" until the asset is sold. According to the guideline, the asset's value must remain at its lowest position until it is sold. This guideline has long been established before cryptocurrency was even created.

However, MicroStrategy found itself in a bind with the Securities and Exchange Commission (SEC). According to newly released filings, the SEC rejected the software company's accounting for its Bitcoin holdings. "We object to your non-GAAP measures' adjustment for Bitcoin impairment charges," the SEC's Division of Corporation Finance said in a letter dated December 3 and released on January 20. "In future filings, please amend to remove this change." — SEC

According to another filing, MicroStrategy responded to SEC by saying it will "revise its disclosures of non-GAAP measures in future filings to eliminate the adjustment for impairment losses and gains on sale relating to Bitcoin, as requested by the Commission."

The SEC's objection effectively bans MicroStrategy from using the unauthorized non-GAAP accounting measure for eliminating the wild swings in Bitcoin price. This means that MicroStrategy's next quarterly earnings report will reveal that the company is currently valued less on paper than it claims.

MicroStrategy began buying Bitcoin as part of a capital allocation strategy in 2020, and has continued to do so ever since, thus turning the company's stock into a Bitcoin proxy. The company's CEO Michael Saylor, who is a Bitcoin bull, however, confirms that the firm will never sell its Bitcoin. “Never. No. We're not sellers. We're only acquiring and holding Bitcoin. That's our strategy", adding that the price drop from $69,000 to where it sits now doesn't bother him.

"I don't think there's anything better we could do to position our company in an inflationary environment than switch our balance sheet to Bitcoin," — Saylor added, claiming that crypto remains the best protection against inflation.

In conclusion, MicroStrategy Inc. intends to continue investing in Bitcoin, regardless of the recent drops in the value of Bitcoin and the request from the US Securities and Exchange Commission (SEC) to " adjust its disclosure in future filings."



Author: Gate.io Observer: M. Olatunji
Disclaimer:
* This article represents only the views of the observers and does not constitute any investment suggestions.
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