March 6, 2024

A Blast from the Past: Fair Market Value vs. Historical Cost Accounting

I graduated from Bucknell University in 2009.

Having locked up a post-graduation job 8 months prior to graduation, I coasted through the majority of my final semester with one exception.

I threw my hat in the ring for the Pennsylvania Institute for Certified Public Accountants (PICPA) student writing contest.

The nerdiest of moves.

Fair Market Value Accounting vs. Historical Cost Accounting

The topic of the writing contest was on fair market value accounting vs. historical cost accounting for various line items on company financial statements.

At the time, we were in the midst of the Global Financial Crisis.

We had just watched every financial firm take a beating—with some like Lehman Brothers and Bear Stearns going completely out of business—booking losses while writing down anything related to real estate or mortgages on their balance sheet.

Does it make sense for a company to value an asset at the price it would likely sell for today, even if those prices were temporarily out of whack?

Or should we use the price that the company originally paid for an asset?

It’s a philosophical question that most accountants know varies from line item to line item on the balance sheet.

My Stance 15 Years Ago Still Holds True Today

In my contest entry, I took the stance that while fair value accounting was having a negative impact on companies and the financial system as a whole in the short run, it was the most accurate way to reflect to shareholders what was really going on beneath the surface of a given company.

I submitted my paper mid-semester and kind of forgot about it.

Fast-forward to graduation weekend. I’m on the 12 hour drive home to Pennsylvania from senior week in Hilton Head—far from home and far from peak performance after the week’s festivities—when my phone lit up with an incoming call from a number I didn’t recognize.

The PICPA was calling to inform me that I had won their student writing contest.

I was desperate to deposit the $2,000 award into my dwindling bank account, and figured that I’d never write about fair value accounting again.

Alex Pron PICPA winner newspaper

FASB’s Recent Changes

After a long hiatus, recently adopted changes by the Financial Accounting Standards Board (FASB) have brought me out of retirement.

ASU 2023-08 marks a significant shift in how companies account for digital assets, moving from historical cost less impairment to fair value accounting. This change not only enhances transparency, but also reflects the true value of digital assets on a company’s balance sheet.

Prior to this change, if Apple wanted to buy bitcoin with some of their $160 billion in cash, here was the hypothetical situation they faced:

  • Apple buys $4 billion worth of bitcoin at $40,000 per bitcoin
  • Bitcoin subsequently drops to $20,000 per bitcoin
  • Apple has to book an impairment loss of $2 billion, directly reducing net income and intangible assets
  • If bitcoin then rallies to $60,000 per bitcoin, Apple does NOT get to adjust net income or the bitcoin on their balance sheet back up—they’re stuck with it at historical cost less impairment—or $20,000.

In short, the previous rules offered companies like Apple only downside when evaluating digital assets like bitcoin as an alternative store of value for their cash.

Moving forward, fair value accounting will allow companies to mark-to-market when bitcoin increases in price, as well as when it drops in price. Increases in price will have a direct and positive effect on the net income of publicly traded companies. To learn more about the change, please check out our recent article, “FASB’s Digital Asset Rule Change for Corporate Cash Management.”

So, What Could this All Mean?

Many bitcoin holders believe that this will open the door to bitcoin as a corporate treasury tool, increasing adoption by institutions outside of the handful of early adopters like MicroStrategy, Tesla, and Block.

Michael Saylor has deemed this one of three conditions needed for bitcoin to rise to $5,000,000 per coin.

Time will tell how quickly companies will look to do something different, but the door is now open.

Make Informed Decisions for Your Financial Future

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Investment advisory services offered through Crossover Capital Brands, LLC (dba Crossover Capital), a Registered Investment Advisor with the U.S. Securities and Exchange Commission.

This material is intended for informational purposes only. It should not be construed as legal or tax advice, and is not intended to replace the advice of a qualified attorney or tax advisor. This information is not an offer or a solicitation to buy or sell securities. The information contained may have been compiled from third party sources, and is believed to be reliable.

Alternative investments – such as hedge funds and private equity/venture capital funds – are speculative and involve a high degree of risk. Likewise, the emergence of digital assets comes with its own speculative characteristics and involves a high degree of risk. Various digital assets have unique features, and the regulatory risk environment continues to change as governance requirements, rules, and lawsuits emerge. There may be material differences in the type of marketplaces available for digital assets, and there could be significant restrictions or limitations on withdrawing from or transferring these types of investments. Digital assets may incur higher fees when compared to traditional assets, and these expenses may offset returns.

Crossover Capital may not be able to independently verify digital asset valuations provided by institutions that hold or offer digital asset services. As a result, Crossover Capital will generally rely on information reported to it by third parties. As such, the information contained herein is for informational purposes. Clients should recognize that they may bear digital asset-based fees and expenses at the manager-level, as well as indirect fees, expenses, and performance-based compensation for digital assets. Spot bitcoin exchange-traded products were recently approved for listing and trading by the SEC. However, such approvals do not indicate SEC approval to use or invest in bitcoin. Clients should remain cautious and aware of the various risks associated with digital assets that have a value tied to bitcoin or other crypto related products.

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