By Himanshu V. Kishnadwala
Chartered Accountant
Compiler’s Note:
In the financial sector, virtual currencies are the topic of discussion. Several companies across the world have embraced this new development and started accepting or investing in virtual currencies. Given below are illustrative disclosures in the financial statements of three companies in the US which have accepted virtual currencies as a mode of settlement of their trade transactions or are investing in the same.
MICROSTRATEGY INCORPORATED
Organisation
MicroStrategy pursues two corporate strategies in the operation of its business. One strategy is to grow our enterprise analytics software business and the other is to acquire and hold Bitcoin.
Digital assets
During the second half of 2020, the Company purchased an aggregate of $1.125 billion in digital assets, comprised solely of Bitcoin. The Company accounts for its digital assets as indefinite-lived intangible assets in accordance with Accounting Standards Codification (‘ASC’) 350, Intangibles-Goodwill and Other. The Company has ownership of and control over its Bitcoin and uses third-party custodial services at multiple locations that are geographically dispersed to store its Bitcoin. The Company’s digital assets are initially recorded at cost. Subsequently, they are measured at cost, net of any impairment losses incurred since acquisition.
The Company determines the fair value of its Bitcoin on a non-recurring basis in accordance with ASC 820, Fair Value Measurement, based on quoted (unadjusted) prices on the active exchange that the Company has determined is its principal market for Bitcoin (Level I inputs). The Company performs an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted (unadjusted) prices on the active exchange, indicate that it is more likely than not that any of the assets are impaired. In determining if an impairment has occurred, the Company considers the lowest price of one Bitcoin quoted on the active exchange at any time since acquiring the specific Bitcoin held by the Company. If the carrying value of a Bitcoin exceeds that lowest price, an impairment loss has occurred with respect to that Bitcoin in the amount equal to the difference between its carrying value and such lowest price.
Impairment losses are recognised as ‘Digital asset impairment losses’ in the Company’s Consolidated Statements of Operations in the period in which the impairment is identified. The impaired digital assets are written down to their fair value at the time of impairment and this new cost basis will not be adjusted upward for any subsequent increase in fair value. Gains (if any) are not recorded until realised upon sale, at which point they would be presented net of any impairment losses in the Company’s Consolidated Statements of Operations. In determining the gain to be recognised upon sale, the Company calculates the difference between the sales price and carrying value of the specific Bitcoins sold immediately prior to sale.
See Note 5, Digital Assets, to the Consolidated Financial Statements for further information regarding the Company’s purchases of digital assets.
Note 5: Digital Assets
During the year ended 31st December, 2020, the Company purchased approximately 70,469 Bitcoins for $1.125 billion in cash, including cash from the net proceeds related to the liquidation of short-term investments and the issuance of its convertible senior notes. During the year ended 31st December, 2020, the Company incurred $70.7 million of impairment losses on its Bitcoin. As of 31st December, 2020, the carrying value of the Company’s Bitcoin was $1.054 billion, which reflects cumulative impairments of $70.7 million. The carrying value represents the lowest fair value of the Bitcoins at any time since their acquisition. The Company did not sell any of its Bitcoins during the year ended 31st December, 2020.
SQUARE, INC.
Bitcoin RevenueThe Company offers its Cash App customers the ability to purchase Bitcoin, a cryptocurrency denominated asset, from the Company. The Company satisfies its performance obligation and records revenue when Bitcoin is transferred to the customer’s account. The Company purchases Bitcoin from private broker dealers or from Cash App customers and applies a small margin before selling it to its customers. The sale amounts received from customers are recorded as revenue on a gross basis and the associated Bitcoin cost as cost of revenues, as the Company is the principal in the Bitcoin sale transaction. The Company has concluded it is the principal because it controls the Bitcoin before delivery to the customers, it is primarily responsible for the delivery of the Bitcoin to the customers, it is exposed to risks arising from fluctuations of the market price of Bitcoin before delivery to the customers, and has discretion in setting prices charged to customers.
Investments in Bitcoin
Bitcoin is a cryptocurrency that is considered to be an indefinite lived intangible asset because Bitcoin lacks physical form and there is no limit to its useful life. Accordingly, Bitcoin is not subject to amortisation but is tested for impairment continuously to assess if it is more likely than not that it is impaired. The Company has concluded Bitcoin is traded in an active market where there are observable prices, a decline in the quoted price below cost is generally viewed as an impairment indicator, in which case the fair value is determined to assess whether an impairment loss should be recorded. If the fair value of Bitcoin decreases below the carrying value during the assessed period an impairment charge is recognised at that time. After an impairment loss is recognised, the adjusted carrying amount of Bitcoin becomes its new accounting basis. A subsequent reversal of a previously recognised impairment loss is prohibited until the sale of the asset. In the fourth quarter of 2020, the Company acquired $50 million of Bitcoin that it expects to hold as an investment for the foreseeable future. There was no impairment loss recorded on Bitcoin for the year ended 31st December, 2020.
Cost of revenue
Transaction-based costs
Transaction-based costs consist primarily of interchange and assessment fees, processing fees and bank settlement fees paid to third-party payment processors and financial institutions.
Subscription and services-based costs
Subscription and services-based costs consist primarily of caviar-related costs, which included processing fees, payments to third-party couriers for deliveries and the cost of equipment provided to sellers. Caviar-related costs for catered meals also included food costs and personnel costs. Subscriptions and services-based costs also included costs associated with Cash Card and Instant Deposit. The caviar business was sold in the fourth quarter of 2019.
Hardware costs
Hardware costs consist of all product costs associated with contactless and chip readers, chip card readers, Square Stand, Square Register, Square Terminal and third-party peripherals. Product costs consist of third-party manufacturing costs.
Bitcoin costs
Bitcoin cost of revenue comprises of the amounts the Company pays to purchase Bitcoin, which will fluctuate in line with the price of Bitcoin in the market.
Other costs
Other costs such as employee costs, rent and occupancy charges are generally not allocated to cost of revenue and are reflected in operating expenses.
TESLA, INC.
Investments
In January, 2021, we updated our investment policy to provide us with more flexibility to further diversify and maximise returns on our cash that is not required to maintain adequate operating liquidity. As part of the policy, we may invest a portion of such cash in certain specified alternative reserve assets. Thereafter, we invested an aggregate $1.50 billion in Bitcoin under this policy. Moreover, we expect to begin accepting Bitcoin as a form of payment for our products in the near future, subject to applicable laws and initially on a limited basis, which we may or may not liquidate upon receipt.
We will account for digital assets as indefinite-lived intangible assets in accordance with ASC 350, Intangibles-Goodwill and Other. The digital assets are initially recorded at cost and are subsequently re-measured on the consolidated balance sheet at cost, net of any impairment losses incurred since acquisition. We will perform an analysis each quarter to identify impairment. If the carrying value of the digital asset exceeds the fair value based on the lowest price quoted in the active exchanges during the period, we will recognise an impairment loss equal to the difference in the consolidated statement of operations.
The cost basis of the digital assets will not be adjusted upward for any subsequent increases in their quoted prices on the active exchanges. Gains (if any) will.
