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Adopting new accounting standards could be a game changer for MicroStrategy (NASDAQ:MSTR), the largest corporate holder of bitcoin (BTC-USD), Benchmark said in a recent note to clients. Such a move could significantly boost the software company’s earnings, giving it a shot at joining the S&P 500.
Since the Michael Saylor-founded company started holding bitcoin (BTC-USD) on its balance sheet in 2020, it has recorded $2.27B in cumulative impairment losses due to a rule by the Financial Accounting Standards Board (FASB) called ASC 350, analyst Mark Palmer noted. As of March 19, MicroStrategy (MSTR) held 214,246 BTC, which, as of Friday afternoon’s price, was worth $13.6B.
Under the rule, firms treat crypto as indefinite-lived intangible assets, which include trademarks, copyrights and other items that rarely change hands. As a result, companies record their crypto at the historical price they paid and review their holdings every quarter for impairments. Holdings are considered impaired even if the price of a crypto falls temporarily during the reporting period, and values can’t be upwardly revised if the price recovers.
Last year, though, the FASB floated new accounting rules that will allow companies to record gains and losses immediately and classify crypto assets as financial assets. The new rules take effect on Jan. 1, 2025, but companies have the option to apply them early.
In MicroStrategy’s (MSTR) case, the earnings impact “would be massive: the company in its 2023 10-K report estimated that early adoption would increase its 2024 beginning retained earnings balance by ~$3.1bn,” Palmer wrote.
MSTR is slated to publish its Q1 2024 results on April 29 after market close. Analysts, on average, expect the company to post an adjusted loss per share of $0.13 vs. EPS of $5.62 in the previous quarter and EPS of $30.59 a year before. MSTR’s notable earnings fluctuations coincide with bitcoin’s (BTC-USD) price volatility. Palmer thinks MSTR could record a gain of over $300 per share in Q1, should it opt for early adoption of the fair-value accounting rules.
“However, we also believe that the tax implications associated with adoption could cause MSTR to hold off on electing that option,” he added.
With MSTR’s shares being highly liquid, its market cap exceeding $18B, and 50% of its outstanding shares available for trading, the company meets nearly all the requirements for S&P 500 inclusion, the note said. Another criterion for the S&P Dow Jones’ index committee to consider a stock for S&P 500 inclusion includes the submission of positive earnings in a company’s most recent quarter. But, as Palmer noted, MSTR has reported losses in 10 of the past 14 quarters.
However, early adoption of the new accounting rules suggests MSTR could meet that requirement.
“Inclusion in the S&P 500 would position MSTR’s stock valuation to receive an ongoing boost from price-agnostic purchases of its own shares resulting from enormous passive inflows,” the note read.
