By Tom Wilson, Anna Irrera and Jessica DiNapoli
LONDON / NEW YORK (Reuters) – When Elon Musk’s Tesla became the biggest name to reveal that he had added bitcoin to his coffers last month, many experts were quick to declare a corporate race towards the growing cryptocurrency.
However, it is unlikely that there will be a combined encryption charge anytime soon, say many financial executives and accountants who are reluctant to risk balance sheets and reputations on a highly volatile and unpredictable asset that confuses conventions.
“When I did my treasury exams, what we were told as the number one goal is to ensure balance sheet safety and liquidity,” said Graham Robinson, PwC treasury and international tax partner and consultant to the UK Association for Corporate Treasurers.
“This is the fundamental problem with bitcoin. If those are the goals of treasurers, breaking them can get you in trouble.”
Tesla Inc’s $ 1.5 billion bitcoin bet has led it to join business software company MicroStrategy Inc and payment company Square Inc, Twitter chief Jack Dorsey, in exchange for some traditional cash reserves. money by digital currency.
Supporters of cryptocurrency see it as a hedge against inflation at a time of unprecedented government stimulus, a falling dollar and record low interest rates that make it difficult to find attractive, high-yielding assets.
Although the changes have sparked more discussions on the board, the headaches of bitcoin’s volatility to account for and store it are likely to prevent a large wave of companies that hold large amounts on short-term balance sheets, according to more than one a dozen CFOs, board members and accountants interviewed by Reuters.
“It will take more than a small handful of disruptive companies investing in bitcoin to impact the narrative in the meeting rooms,” said Raul Fernandez, a businessman and investor who sits on the board audit committee of chip maker Broadcom Inc, as well as other companies.
“Large global companies, I can’t see these conversations going on right now.”
GRAPHIC: Bitcoin bet – https://fingfx.thomsonreuters.com/gfx/mkt/jbyprdydope/Pasted%20image%201614856822322.png
BITCOIN’S INTANGIBLE TANGLE
One problem may lie in the heck of accounting details in an accounting industry that, like many others, is still taking stock of the nature of cryptocurrencies.
The Financial Accounting Standards Board, which sets accounting standards for companies in the United States, has no specific guidance for cryptocurrency accounting. However, according to discussions between a separate US trade body, companies apply the FASB’s existing guidance on accounting for “intangible assets”, which generally includes intellectual property, brand recognition or goodwill.
According to these rules, companies other than investment firms or brokers cannot register gains in share value if the price of bitcoin goes up – but they must register their investment as a decrease in recoverable value if it falls.
In addition, once a company reduces its holdings, it cannot record subsequent earnings until it sells.
On the other hand, companies periodically reflect the impact of fluctuations in traditional currencies in their financial statements.
The FASB has no immediate plans to revise its treatment of bitcoin, as the issue affects few of its constituents, according to a source familiar with the matter.
“I don’t think it’s the best accounting yet,” said Robert Hertz, a former president of the FASB. “I hope that if more conventional companies go into bitcoin, the accounting standards board will be able to review the accounting treatment.”
Outside the United States, cryptocurrencies are also often treated as intangible assets. But, in contrast to the guidance of the FASB rules, write-offs can be reversed in future years. In certain cases, companies can register bitcoin at market value. See EXPLAINER:
CRYPT BILLION OF COMPANIES
Publicly traded companies together hold about $ 9 billion in bitcoin, data from the Bitcoin Treasuries website show. About 80% is held by Tesla and MicroStrategy, the latter with more than $ 4.5 billion.
Square, which allows users to buy and sell bitcoin, said last month that it added an additional $ 170 million of the virtual currency to its coffers.
Obviously, if the price of bitcoin goes up, a company can always simply sell its stakes, thus making some gains. However, it is still a risky investment, given the history of cryptocurrency’s violent swings.
In 2013, for example, bitcoin started at around $ 13 and reached over $ 1,000. In 2017, it went from about $ 1,000 to about $ 20,000. In early 2020, it dropped to less than $ 4,000. It fell more than 25% last month, just a week after breaking a record above $ 58,000. It has already recovered part of its losses.
About 5% of chief financial officers (CFOs) and senior financial leaders said they plan to keep bitcoin on their balance sheets in 2021, a survey of 77 executives conducted by U.S. research firm Gartner found out last month.
About 84% of respondents said they never planned to keep it as a corporate asset, citing volatility as the main concern, followed by the board’s risk aversion, slow adoption as a widespread payment method and regulatory issues.
“I think, most of the time, you will find that companies will avoid this sort of thing,” said Jack McCullough, chairman of the CFO Leadership Council and former CFO.
“CFOs are probably very conservative in managing corporate treasuries. They are happy to invest money in very safe places with low interest rates. Their job is to help develop the company through its operations, and the treasury needs to be safe and protected. “
WHY PUT MY NECK ON THE LINE?
Supporters of the cryptocurrency, however, say the reason for companies to buy bitcoin is clear, especially the fall of the dollar – the dominant reserve currency – which has dropped about 4.5% compared to a basket of major currencies in the year past.
“The value of the dollar over time is getting weaker and weaker,” said Dave Sackett, CFO of ULVAC Technologies Inc, the American subsidiary of a Japanese vacuum equipment manufacturer and an active cryptocurrency investor.
“Bitcoin reverses the script on that.”
Sackett suggested that ULVAC executives invest in bitcoin last April, suggesting that they take a risk and then withdraw money with potential gains. They rejected the opportunity, he said.
Other possible headaches for executives include questions about how a company can safely maintain a cryptocurrency and how much it should disclose to shareholders about security precautions, said Tim Davis, director of financial and risk advisory practice at Deloitte & Touche , which advises companies on holding crypto on their balance sheets.
High-profile thefts in exchanges highlighted the problems of secure storage of digital assets. The loss of passwords for digital wallets is also a risk. Offline or “cold” storage is widely seen as the best defense against hackers, but there are few regulatory standards, if any.
“Do you keep custody yourself?” Davis said. “Do you have foreign exchange custody? How much do you want to have in a hot wallet compared to a cold wallet?”
Ultimately, experts added, the expansion into bitcoin by companies with no ties to the cryptocurrency market may depend on financial executives’ willingness to take risks.
“The general consensus among treasurers is that very few of them will follow this trend initially,” said Naresh Aggarwal of the UK Association of Corporate Treasurers.
“As a treasurer, if I’m right and the price doubles, the company can sell its stake and make a profit. Although the company may be worth more, this will not be reflected in my remuneration ”, he added.
“But if the price goes down, I’m pretty confident that I will be fired. Why bother putting my neck at risk?”
(Reporting by Tom Wilson and Anna Irrera in London and Jessica DiNapoli in New York; Editing by Pravin Char)