On February 8, 2021, Tesla’s revealed through its 10-k filing to the SEC that it had purchase $1.5 billion of bitcoin, totaling 7.5% of the company’s cash, and that it planned to accept the cryptocurrency as a form of payment for the company’s products. This announcement followed a string of cryptocurrency related tweets by Tesla’s co-founder and CEO (Musk). Musk justified the move into Bitcoin as “simply a less dumb form of liquidity than cash” and added, “when fiat currency has negative real interest, only fool would not look elsewhere.” Although Tesla’s announcement was cheered by cryptocurrency enthusiasts, it was met with mixed reactions by stock investors and market participants. Market observers raised various questions about Tesla’s decision to convert its cash into Bitcoin. Did this move make sense from business perspective? What is the proper way to account for these transactions and what are the implications for evaluating Tesla’s financial performance?

Among the topics heavily discussed about Tesla’s move was the accounting treatment for Bitcoin. One reason was that there was no official guidance under the GAAP/FASB for how companies should account for digital assets (arguing that too few companies had material holdings in digital assets). Absent formal guidance, Tesla had to rely on industry guidance.

1. There are four possible asset categories that cryptocurrency holdings can fall under – Cash & Cash Equivalent, Inventory, Financial Instruments and Intangible Assets. Based on your research (publicly available guidance etc), which is the best classification and why?
2. How did Tesla account for Bitcoin on its 10-K, and did Tesla explained why?
3. Had Tesla chosen to account for the Bitcoin in a different way, what could be the impact on Bitcoin’s value in each financial reporting period and would it impact the company’s net income?
4. Financial experts estimated that Tesla’s average cost basis for its $1.5 billion in Bitcoin is $32,886.60. Bitcoin Price was $58,800.00 on March 31, 2021 n Tesla end of the first Quarter. How much gain will tesla record on it quarterly report? Would your answer be different if Tesla accounted for Bitcoin differently (Cash & Cash Equivalent, Inventory, Financial Instruments and Intangible Assets)?
5. Assume that Tesla sold 500 cars on February 28^th, each car for 1 Bitcoin (price=$46,189.90). How should Tesla report the sale on its Balance Sheet and Income Statement on March 31^st 2021 (price=$58,800.00). Should Tesla classify the Bitcoin the same way?
6. If Bitcoin price went to $25,000 on the end of the 2^nd quarter, would Tesla need to update any information related to the 500 cars sale?

Answer rating: 100% (QA)

The best asset classification for Teslas Bitcoin holdings is Intangible Assets Intangible assets are nonphysical longterm assets that have a finite us... View the full answer