MicroStrategy: Accounting for Cryptocurrency

On February 15, 2021, Alina Moss, an analyst who covered the technology company MicroStrategy, pondered a rise in MicroStrategy’s share price. Moss had dialed into the company earnings call. When it ended, Moss had more questions than answers. MicroStrategy had recorded a meager operating income of $390,000 in the fourth quarter of fiscal year 2020, yet its non-GAAP operating income was $30.1 million and its share price had climbed 160% during the period. In 2020, MicroStrategy had invested heavily in Bitcoin, and its CEO Michael Saylor said that MicroStrategy would continue using Bitcoin as its primary treasury reserve asset. The accounting treatment of cryptocurrencies was murky as standard setters had not yet decided how firms should account for cryptocurrencies, leaving it up to companies to determine the appropriate accounting. MicroStrategy treated cryptocurrencies as intangible assets on its financial statements, as did many other firms. Accounting rules for intangible assets required reporting downward price shifts as impairment losses but did not require the recording of upswings in price. MicroStrategy disclosed a significant decline in net income as compared to the fourth quarter of 2019 because of impairment losses on Bitcoin. How well was MicroStrategy really doing? Did the current accounting treatment for cryptocurrencies make sense for companies holding Bitcoin? How should investors assess firms’ Bitcoin investments?