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Bitcoin's Rise Benefits Shareholders More! MicroStrategy's Stock Price Surges Thanks to New FASB Regulations

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The Financial Accounting Standards Board (FASB) has passed a new accounting rule that allows companies like MicroStrategy, which hold cryptocurrencies, to show the value of their cryptocurrency assets on financial statements at Fair Value. MicroStrategy's stock price surged yesterday in response to this news.

FASB passes Fair Value accounting standard to be implemented by the end of the year, benefiting companies like MicroStrategy that hold cryptocurrencies

Michael Saylor, founder of MicroStrategy, the U.S. publicly traded company with the most Bitcoin, quickly announced this good news on Twitter! But how does this standard actually affect the financial statements of publicly traded companies?

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Previously, only able to recognize "digital asset impairment"

When evaluating a company's performance, we usually assess whether it is making money or not through the Income Statement, as the income statement shows the company's revenue and various expenses. MicroStrategy has an expense item on its income statement called "digital asset impairment losses." From every previous financial report of MicroStrategy, this expense item has always been present, indicating that holding Bitcoin on its financial statements is always in the "negative" due to the previous accounting standards. MicroStrategy could only use the lowest price of Bitcoin during each quarter as the evaluation of its price. If the lowest price of Bitcoin in the current quarter is lower than the previous quarter, MicroStrategy has to recognize "digital asset impairment." However, if the price of Bitcoin rises, at most, no expenses are recognized. MicroStrategy also cannot recognize the increased value of Bitcoin as "digital asset appreciation." This result of recognizing only losses and not gains significantly affects the company's financial performance!

MicroStrategy's most recent quarterly financial report

Recognizing unrealized gains and losses at Fair Value

The new FASB accounting standard requires companies holding or investing in cryptocurrencies to report the value of their digital assets based on Fair Value. Fair value refers to the price a seller can receive for an asset and is mainly applied to financial assets. The simplest way to assess fair market value for publicly quoted financial instruments is to use the market's public quote as the fair market price, which is commonly referred to as "market valuation." For example, if I buy shares of TSMC at 100 yuan and on the reporting date, TSMC's closing market price is 95 yuan, then its fair market price is 95 yuan, and the company must recognize a loss of 5 yuan. Conversely, if TSMC's closing price on that day rises to 105 yuan, the company can also recognize a gain of 5 yuan. This allows investors to clearly see the price changes of the assets held by the company.

Bitcoin's price volatility affects company financial statements

The purpose of this policy is to obtain the latest value of assets, including rebounds after price declines, to provide investors with more accurate information. Although the new standard will make the earnings of companies with large investments in cryptocurrencies more unstable due to the significant price volatility of Bitcoin, compared to the old rules, the new rules are definitely advantageous to these companies as previously only losses were recognized without recognizing gains. The new rules will take effect in 2025, but FASB agrees that companies can apply these rules ahead of time.

MicroStrategy's stock price surged more than 2.2% at one point yesterday but ultimately closed only up 0.42% at $350.7 due to overall market drag. Nasdaq index fell by 1.06% yesterday, influenced by the surge in oil prices.

Image Source: CNBC