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The nature of Bitcoin on the balance sheet will have an impairment effect on Tesla’s accounts.
Original title: ” It is Tesla’s accountants and shareholders who are more upset with Musk than investors… “
Written by: Sam Reynolds
Compiler: Qin Xiaofeng
Elon Musk, who is volatile on Bitcoin, not only annoys crypto investors, but also makes Tesla (NASDAQ:TSLA) accountants a headache.
In the first quarter of this year, Tesla announced the purchase of $1.5 billion worth of Bitcoin and included it on its balance sheet. The entry of Tesla also pushed Bitcoin to an all-time high of about $65,000. However, as Musk declared on Twitter that Bitcoin was excessively polluted and not environmentally friendly, and did not meet Tesla’s ESG (Environmental, Social and Corporate Governance) requirements, the price of Bitcoin plummeted, dropping to $30,000 at one point.
“We are concerned about the rapid increase in the use of fossil fuels during Bitcoin mining and trading, especially coal, which emits the most serious emissions among all fuels,” Musk said.
But for Tesla, the greater risk is that the nature of Bitcoin on the balance sheet will impair the company’s accounts, forcing it to write down and reduce profits for several quarters-and for special For Sla, the original profit was not good, and now it may be even worse again.
Odaily Planet Daily Note: The so-called asset impairment refers to the loss caused by the asset’s book value being higher than its recoverable amount, which is calculated in the income statement and directly affects the current profit.
According to the last quarter of Tesla earnings report revealed that the company obtained from earnings and carbon emissions trading Bitcoin in more profits, rather than sell the car. Despite this, the company still only recorded a pre-tax profit of US$15 million, as well as US$28 million in impairment charges.
Odaily Planet Daily Note: Last quarter, Tesla earned $272 million in revenue from the sale of Bitcoin, of which net profit was $101 million.
Including Bitcoin on the balance sheet, Tesla has to bear the negative impact of impairment, but will not enjoy the positive impact of market appreciation.
Tesla’s intangible assets problem indefinitely
Tesla is not the first public company to buy Bitcoin, and MicroStrategy is also one of them. The company’s balance sheet also has a large amount of Bitcoin (note: 92079 BTC), and has compiled a guide explaining how the corporate finance department treats Bitcoin:
However, we believe that cryptocurrencies generally fit the definition of intangible assets indefinitely because they do not convey specific rights like financial instruments. Intangible assets indefinitely are not amortized, but they need to be recognized and measured at their historical cost; when their book value exceeds their fair value, they will be recognized as impairment; the subsequent reversal of previously recognized impairment losses is prohibited.
The above paragraph introduces us to intangible assets commonly used by accountants indefinitely. This type of asset is usually reserved for quantifying the prescribed value of a brand or trademark. For cryptocurrencies, there is a problem: these cryptocurrencies can only be depreciated and cannot be subsequently transferred back, and gains can only be realized when the assets are sold.
Tesla even disclosed this in its financial report:
According to applicable accounting rules, digital assets are considered intangible assets indefinitely. Therefore, at any time after the acquisition of these assets, when their fair value (ie market value) is lower than our book value (ie investment cost), any decrease will require us to confirm the impairment loss; and before selling these assets , We may not make upward corrections to any increase in market prices. As we currently intend to hold these assets for a long time, even if the overall market value of these assets increases, impairment losses may still have a negative impact on our profitability during that period.
In other words, even if the price of Bitcoin is pushed above Tesla’s cost price, in the eyes of shareholders, this has no effect on the company’s balance sheet. In theory, there will be some unrealized gains that will bring more liquidity to the company. However, if the price of Bitcoin drops below Tesla’s purchase price, it will be a huge blow to its balance sheet.
Solution: Subsidiary holding currency
The CFOs of listed companies also seem to understand that it is very difficult to normally hold Bitcoin on the balance sheet, so they choose to avoid it.
A survey released by Gartner in February found that only 5% of corporate executives intend to invest in Bitcoin as a corporate asset this year. Most companies are not as enthusiastic about Bitcoin as Microstrategy or Tesla.
“84% of respondents said that the volatility of Bitcoin brings financial risks.” Gartner’s head of financial business research Alexander Bant said, “It is extremely difficult to mitigate the price fluctuations that have occurred in cryptocurrencies in the past 5 years. of.”
The volatility of cryptocurrencies may cause large-scale impairment losses on the balance sheet. This looks like an unsolvable problem, but is there really no way?
Create a subsidiary to hold Bitcoin, isolate the parent company from asset fluctuations, and provide a number of ways to benefit from the rise. This is exactly what MicroStrategy is practicing.
MicroStrategy established a subsidiary called MacroStrategy LLC, which will hold approximately 92,079 bitcoins acquired by the parent company. At current prices, the total value of Bitcoin held by the company is approximately US$3.37 billion. In addition, the debts used by the parent company to fund the purchase of Bitcoin by the subsidiary will be guaranteed by the parent company itself.
But Tesla obviously does not have this patience. Due to Musk’s impulse and perseverance, Tesla and its shareholders got the two worst results: a crypto bear market, and the inability to use Bitcoin as a long-term asset. Asset impairment in the future will definitely push Tesla’s stock down, and shareholders will once again be annoyed by Musk.
The latest news is that Musk issued a document stating that after confirming that miners use a reasonable proportion of clean energy (about 50%), and the future trend is good, Tesla will re-allow the use of Bitcoin transactions. The market also rebounded, and Bitcoin returned to the vicinity of $40,000.
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