MicroStrategy stock surges with new FASB rules.

Yamini003

The Financial Accounting Standards Board (FASB) in the United States has passed a new accounting rule that allows companies holding cryptocurrencies, such as MicroStrategy, to report the value of their cryptocurrency assets at fair value on their financial statements. MicroStrategy's stock price rose against the trend following this news.

MicroStrategy, a U.S. publicly traded company with the most Bitcoin holdings, saw its stock price rise. The founder of MicroStrategy, Michael Saylor, quickly announced this good news on Twitter. But how does this rule affect the financial statements of publicly traded companies?

Previously, only ""Digital Asset Impairment"" was recognized.

When we evaluate a company's performance, we usually look at the income statement to assess whether it is making money or not because the income statement shows a company's revenue and various expenses. In MicroStrategy's income statement, there has always been an item called ""Digital Asset Impairment Losses,"" which means that the company's holdings of Bitcoin were shown as a negative value on its financial statements. Under the previous accounting rules, MicroStrategy could only use the lowest Bitcoin price during the quarter as the basis for evaluating its value. If the lowest Bitcoin price in the current quarter was lower than the previous quarter, MicroStrategy had to recognize ""Digital Asset Impairment."" However, if the price of Bitcoin rose, at most, no expenses would be recognized, and MicroStrategy could not recognize the increased value of its assets. This one-sided recognition of losses without recognizing gains significantly affected the company's financial performance.

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 at fair value. Fair value refers to the price at which an investor can sell an asset, mainly applied to financial assets. For publicly quoted financial instruments, the simplest way is to use the publicly quoted market price as the fair market price, which is what we often call ""market price evaluation."" Suppose I buy TSMC's stock for $100, and on the reporting date, the closing market price of TSMC is $95. In that case, the fair market price is $95, and the company has to recognize a loss of $5. Conversely, if TSMC's closing price that day reaches $105, the company can also recognize a gain of $5. This allows investors to see more clearly the price changes in the assets that the company holds.

Bitcoin has a high market price fluctuation, which affects the company's financial statements.

The purpose of this policy is to obtain the latest value of assets, including the recovery after a price drop, providing investors with more accurate information. Although this new standard will make the profits of companies that invest heavily in cryptocurrencies more unstable due to the significant fluctuations in the price of Bitcoin, it is undoubtedly beneficial for these companies compared to the old rules (which only recognized losses and not gains). The new rules will take effect in 2025, but the FASB has agreed that companies can apply these rules in advance.

Ritu13

The new changes in the rules will indeed affect the price volatility in the cryptocurrency market.