This report highlights Tesla’s chosen accounting treatment of its recent purchase of $1.5 billion in Bitcoin and how it will impact GAAP net income. Ultimately, Tesla’s purchase of Bitcoin is a distraction from the numerous challenges the company faces.

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Bitcoin Treatment and Its Impact on Fundamentals

While analyzing Tesla’s 2020 10-K, analyst Hunter Anderson found that Tesla plans to account for its Bitcoin assets as long-term intangibles as opposed to short-term cash equivalents. This distinction means Tesla will record write-downs on its Bitcoin assets as they fall in value. On the other hand, it can also record large accounting gains should it sell those assets after an increase in value.

In other words, Tesla’s chosen accounting treatment gives the firm the ability to potentially manipulate earnings using a non-core, non-operating, and notoriously volatile asset. See the disclosure from the firm’s 2020 10-K here.

While it might make conceptual sense to treat Bitcoin as an intangible asset, assuming the company plans to hold it long term, it also goes against the narrative that Bitcoin is a liquid store of value. Companies already use numerous accounting loopholes to manage earnings and it appears Bitcoin could be used in a similar manner.  

No Substitute for Diligence

We adjust for all unusual items, both hidden and reported, on the income statement and balance sheet to calculate a more accurate measure of a firm’s profitability. While Tesla’s Bitcoin purchase doesn’t require any adjustment yet, without being aware of all unusual items, you’ll never know when an adjustment will be necessary and materially impact a firm’s true fundamentals, and in turn, its valuation.

Only our “novel dataset”, which leverages our Robo-Analyst technology, enables investors to overcome flaws with legacy fundamental datasets to apply reliable fundamental data in their research. Core Earnings: New Data & Evidence, accepted for publication by The Journal of Financial Economics also proves the superiority of our fundamental dataCore Earnings models, and securities research

This article originally published on February 11, 2021.

Disclosure: David Trainer, Hunter Anderson, Kyle Guske II, Alex Sword, and Matt Shuler receive no compensation to write about any specific stock, sector, style, or theme.

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