MSTR's New Bitcoin Accounting Standard To Drive 'Financial Swings,' Make Earnings 'Volatile,' Says Expert After Lawsuit Hits Strategy

Michael Saylor‘s Strategy Inc. MSTR, formerly MicroStrategy, was hit with a lawsuit, specifically after adopting the new accounting rules of reporting cryptocurrency assets on its financial statements. This move could make the Bitcoin BTC/USD treasury company’s earnings more volatile, highlights an expert.

What Happened: Before the implementation of the new accounting rule, crypto assets like Bitcoin were reported on the financial statements under the existing intangible asset guidance.

According to Arthur Azizov, the founder and investor at B2 Ventures, after the implementation of the new accounting rules, Strategy may face both “operational and financial downstream risks,” in case of falling Bitcoin prices.

Under the old rules, if the intangible asset’s price fell below its acquisition price, an impairment loss was recorded in the statements, and even if the price went back up in other quarters, the write-down could not be reversed.

However, the new ‘Accounting Standards Update (ASU) No. 2023-08, Intangibles—Goodwill and Other—Crypto Assets (Subtopic 350-60): Accounting for and Disclosure of Crypto Assets’ requires companies to measure crypto assets at fair value each reporting period.

Reporting the assets based on their fair value will reflect the fluctuation in the price of the asset in the financial statements of the company in each reporting period.

“A Bitcoin's ‘fallen knife’ will likely lead to a respective price reduction of Strategy's assets. Under the new U.S. accounting standard (ASU 2023-08) and ASC 820, Bitcoin is now measured at a fair value, meaning that any significant price fluctuation (up or down) directly influences the company's income statement each reporting period,” Azizov said.

Strategy reported a $5.91 billion unrealized loss, driven by the new accounting treatment during the first quarter of the ongoing fiscal year in April.

“During prolonged downturns, this exposes Strategy to deep market-driven financial swings and makes earnings particularly volatile,” Azizov told Benzinga.

Why It Matters: On Monday, the company was hit with a lawsuit citing “misleading statements” regarding its financial outlook ahead of this particular accounting change.

The plaintiffs alleged that Strategy downplayed the risks of using the fair value method for its Bitcoin and overemphasized new metrics like “BTC Yield” and “BTC Gain,” while concealing potential losses.

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The lawsuit also states that MSTR failed to adequately disclose crucial information about:

The various risks associated with the volatility of Bitcoin.
The potential magnitude of losses the company could recognize due to its adoption of a specific accounting standard.

Lastly, Azizo also added that “There may be a severe equity erosion; debt could become truly burdening; and brand reputation could be undermined.”

Price Action: MSTR shares ended 3.41% higher on Monday and were 0.26% higher in premarket on Tuesday. The company has advanced 37.80% on a year-to-date basis and 139.36% over a year.

According to its May 19 SEC filing, MSTR acquired 576,230 BTC for approximately $764.9 million

With its latest Bitcoin acquisition at an average price of $103,498 per coin, the firm’s average purchase price for BTC is now $69,726. This has boosted its unrealized gains to roughly $18.8 billion.

Benzinga Edge Stock Rankings shows that Strategy had a stronger price trend over the short, medium, and long term. Its momentum ranking was solid, however, its value ranking was poor at the 3.08th percentile. The details of other metrics are available here.

The SPDR S&P 500 ETF Trust SPY and Invesco QQQ Trust ETF QQQ, which track the S&P 500 index and Nasdaq 100 index, respectively, fell in premarket on Tuesday. The SPY was down 0.14% to $594.02, while the QQQ declined 0.19% to $521.04, according to Benzinga Pro data.