Earlier this week Tesla disclosed in its annual filing to the SEC that it had purchased $1.5 billion worth of Bitcoin to diversify and maximise its return on cash.
“In January 2021, we updated our investment policy to provide us with more flexibility to further diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity.”
Tesla 10-k 2020
Can Tesla use Bitcoin to impact earnings?
The purchase provides optionality to management and places them in a position of power should they wish to increase earnings in subsequent quarters.
If the Bitcoin price continues to climb, Tesla may dispose of some and realise a profit, allowing the company to increase future earnings. However unlike other assets, a falling Bitcoin price is of less concern to Tesla’s CEO Elon Musk who has the unique ability to directly influence the asset’s value as he has recently proven with the meteoric rise of Dogecoin.
How does the accounting work?
The Bitcoin acquired will be carried on the balance sheet as an indefinite lived intangible asset*. If the Bitcoin price falls from where Tesla purchased it, Tesla must adjust the carrying value down to the lowest price recorded during the quarter, essentially recognising any unrealised losses and simultaneously lowering its cost base. However, if the price increases the company will not recognise the gain until it sells all or part of the Bitcoin, allowing it to carry forward any unrealised gains to future periods where it may decide to use them to boost earnings.
Whether Tesla will use Bitcoin to impact earnings only time will tell but one thing’s for sure, there will be no shortage of opinions about this topic in coming weeks.
*Indefinite life asset – assets that continue to generate cash for an indefinite period and therefore cannot be amortised but must be tested for impairment
*Intangible asset – assets that lacks physical substance. Examples are patents, copyright, franchises, goodwill, trademarks and trade names, as well as software.
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The Education of a Value Investor by Guy Spier
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