Accountants Hate Him: One Weird Trick Made Elon a Nightmare For Tesla’s ($TSLA) CPAs

Elon Musk's complicated relationship with Bitcoin is doing more than aggravating cryptocurrency traders, it's going to cause a major headache for Tesla's (NASDAQ:TSLA) accountants.

Before this year , Tesla purchased $ane.5 billion in Bitcoin to place on its balance canvas pushing bitcoin to an all-time high of $63,000. But, equally Elon Musk went on a Twitter tirade declaring Bitcoin as overly polluting and non in line with Tesla's ESG mandate, the toll complanate bottoming out at $35,000 .

But here's the even bigger risk for Tesla: the nature of bitcoin on the residuum canvas will have an impairment effect on the visitor'southward books and force it to do a write-downward and demolish several quarters of profits — which are sometimes at best tenuous. Tesla's last quarterly earnings showed that the company was booking more profit from bitcoin's gains and trading of carbon credits rather than selling cars. And withal, the company just booked a pre-revenue enhancement profit of $fifteen 1000000, along with an impairment charge of $28 million.

Tesla is only going to experience the downside of holding bitcoin on the balance sheet, and not the upside.

Tesla's Indefinite-Lived Intangible Assets Trouble

MicroStrategy, which also has a significant amount of bitcoin on its rest sail, has put together a guide explaining how bitcoin is treated by corporate treasuries:

However, we believe that cryptocurrencies would by and large meet the definition of an indefinite-lived intangible asset because they practice not convey specific rights in the aforementioned way every bit financial instruments. Indefinite-lived intangible assets are not amortized, but are required to be recognized and measured at their historical cost; impairment is recognized when their conveying amount exceeds off-white value. The subsequent reversal of previously recognized impairment losses is prohibited

In it describes what accountants telephone call indefinite-lived intangible assets, an asset course usually reserved to quantify the value prescribed to brands or trademarks.

In that location's a problem: these can only be written downwardly in value, never written up. Gains are only realized when assets are sold.

Tesla even discloses this in its 10K:

Digital assets are considered indefinite-lived intangible assets under applicable bookkeeping rules. Accordingly, whatever decrease in their fair values below our conveying values for such assets at any fourth dimension subsequent to their acquisition will require united states of america to recognize impairment charges, whereas nosotros may make no upward revisions for any market toll increases until a auction. As nosotros currently intend to hold these avails long-term, these charges may negatively touch on our profitability in the periods in which such impairments occur even if the overall market values of these avails increase.

If the laser eyes push bitcoin to a toll higher than what Tesla bought the bitcoin for, it does zip for the rest sheet of the company in the eyes of shareholders. Theoretically, there will be some unrealized gains that give the company more than liquidity; on paper, the bitcoin is worth $45,000 but if the market dictates bitcoin is now worth $xc,000 in that location'south a significant pool of liquidity on hand. But if bitcoin's value drops to a price below what Tesla bought the tokens for, it'due south a massive hit on the auto markers balance sheet.

But There'due south Also Some other Weird Trick

CFOs seem to empathise that bitcoin is a tricky creature to properly hold on the balance canvas. A survey by Gartner released in February constitute just 5% of business executives intended to invest in bitcoin as a corporate nugget this year. Most companies don't have the enthusiasm for bitcoin that Microstrategy has, or Tesla one time had.

"Eighty-iv pct of the respondents said that bitcoin'due south volatility posed a fiscal hazard," said Alexander Bant, main of enquiry in the Gartner Finance practice. "It would be extremely difficult to mitigate the kind of toll swings seen in the cryptocurrency in the last five years."

And then what do you do when the volatility of the underlying asset creates a scenario where yous could be faced with a massive impairment on your balance canvass unrelated to the material wellbeing of the company?

Create a subsidiary to hold the bitcoin, firewalling the parent from the worst gyrations of the nugget only giving plenty of ways to benefit from the upside.

MicroStrategy Completes $500 Meg Offering of 6.125% Senior Secured Notes Due 2028 with #Bitcoin Employ of Proceeds. @MicroStrategy'due south existing approximately 92,079 bitcoins are being held by a newly formed subsidiary, MacroStrategy LLC. $MSTRhttps://t.co/avdKhHDLMH

— Michael Saylor (@michael_saylor) June xiv, 2021

That'southward exactly what MicroStrategy did. The firm that pioneered digital assets on the rest sheet has formed a subsidiary, MacroStrategy LLC, which will hold approximately the 92,079 bitcoin that MicroStrategy has acquired. The worth of the company's total bitcoin belongings comes to effectually $3.37 billion at current prices. The debt that MicroStrategy is taking out to fund the bitcoin purchases for MacroStrategy will exist secured past MicroStrategy itself, even so,

Only Tesla wasn't that patient. Past acting with Musk's compulsiveness and obsession Tesla and its shareholders got the worst of both worlds: a bear market, and the inability to utilise bitcoin as an nugget with a long time horizon. The impairments are sure to button downwardly Tesla'southward stock, and its shareholders will have another reason to exist annoyed with Musk.