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| AA Uses Only the Most Accurate Equipment for His Estimates |
I thought I’d throw my chapeau into the ring of those analyzing Tesla’s Bitcoin Holdings.
And then for good measure provide my own analysis of the 1Q sale.
Summary
Numbers of BTC and original costs are estimates.
Tesla originally purchased BTC 46,561.73 at an average original cost of US$ 32,215.30 per “coin”. (My Scenario #2).
Using averages of my Scenario #1 and #2, in March it sold 4,466.64 BTC at an average price of US$ 60,895.95 per coin.
As of 31 March Tesla held BTC 42,901.81 at an average cost of US$ 31,621.36 per coin.
Under US accounting “rules” once Tesla takes an “impairment” on its BTC holdings, it cannot reverse it if fair value increases later. The only way to “capture” the increase is to sell BTC in which case the higher fair value over carrying cost is a component of net profit.
Because of these accounting “wrinkles”
Tesla may have an economic incentive to support BTC’s price because impairments flow through the income statement.
Or to sell BTC to generate a profit to offset impairment charges.
Introductory Comments
Don’t be followed by the apparent precision in my numbers below.
There isn’t sufficient information to achieve precision.
So my numbers and those of others cited below can only be rough estimates.
You’ll find those other estimates here and you can compare methodology and results.
First up is Shawn Tully at Fortune: 38,300 BTC held at 31 March 2021.
Second is Chuck Jones at Forbes: 42,902 BTC held.
I’ll be using Tesla’s 1Q2021 10Q as the source document for data.
If you’re interested in the US accounting treatment for digital assets, here’s a link to an AICPA publication on ASC-350.
What are Tesla’s BTC Holdings as of 31 March 2021?
From Note 3 in Tesla’s 10Q the fair market value of their BTC as of 31 March 2021 is some US$ 2.48 billion.
Using Yahoo Finance data, the closing price of BTC on 31 March was US$ 58,918.83.
That equals BTC 42,901.81. US$2.48 billion divided by US$ 58,918.83.
That number is in agreement with Chuck Jones’ calculation.
Shawn’s number differs because he’s using a profit of US$ 101 million on the March BTC sale, due to his including the US$ 27 million impairment as a component of the sales proceeds. Therefore, his cost of sale is US$ 171 million not US$ 144 million.
By my calculation the carrying value of Tesla’s BTC portfolio is US$ 31,621.36 as of 31 March 2021. US$1.331 billion divided by 42,091.81 coins.
But that is an adjusted cost after the US$ 27 million impairment. (Also disclosed in Note 3).
First cut.
To determine the original purchase price of the remaining BTC we have to add back the US$ 27 million impairment charge. That means the original cost of the Bitcoin remaining after the March 2021 sale but before impairment is actually US$ 1.358 billion.
Note the implicit assumption that the impairment was taken after the March sale.
On this basis the historic cost per Bitcoin is US$ 32, 262.81.
But another wrinkle.
As Shawn Tully points out, reconciling the balance of the BTC holdings results in a US$ 2 million difference.
That is, Tesla purchased US$ 1.5 billion sometime between 1 January 2021 and early February. The last purchase would have had to occurred some time prior to 8 February.
Why?
Tesla first announced the purchase in its 2020 10-K which is dated 8 February.
As per note #3 in Tesla’s 10Q Tesla recognized gains of US$ 128 million on the BTC sale and took a US$ 27 million impairment.
As per my understanding of the required accounting, the impairment is unrelated to the sale.
From the Consolidated Statement of Cash Flows, we see that Tesla received proceeds of US$ 272 million from the BTC sale. If the recognized gain on the sale was US$ 128 million, then the cost of the BTC must be US$ 144 million.
(Note that is 9.6% of the original purchase amount and would seem confirm Tesla’s 1Q statements that it sold 10% of its original holding)
US$ 144 million plus US$ 27 million equals an expected US$ 171 million decrease in the balance of BTC from first purchase through 31 March 2021
But that amount is US$ 2 million more than the net change in BTC holdings—US$ 169 million.
Is this due to rounding? Or to vehicle purchases using BTC? Or a combination of both?
We don’t know. Sadly, a question that might have shed light on this issue was not selected for the Q&A on Tesla's 1Q Call.
We also don’t know what the US$ 27 million impairment charge relates to.
Is it the original BTC purchase? Or BTC received for car purchases? Or both? Or something else?
Scenario #1
If we assume there were no material car purchases with BTC and use the US$ 1.358 billion figure above, the original historic purchase cost per “coin” is US$ 32,262.81.
Tesla would have had to sell 4,463.34 BTC to equal the US$ 144 million cost of BTC sold in March.
The original number of BTC bought would then be 46,555.15
You’ll notice this equals US$ 1.502 billion at the estimated historic cost above. Thus it includes the unexplained US$ 2 million “difference”
Scenario #2
Same assumptions as Scenario #1, but US$ 2 million assumed rounding differences is excluded. The original cost of the BTC purchase is US$ 1.356 billion. That gives an original purchase cost of US$ 32,215.30 per “coin”.
In this case Tesla sold some 4,469.93 BTC.
Under this second scenario, it would have originally bought 46,561.73 BTC
Key Accounting Considerations
Under ASC-350 and ASC-820, once fair value is lower than carrying value, Tesla must make a one way adjustment in carrying value via an impairment charge.
If fair value later increases, the impairment can not be reversed. (Question #6 pages 6-7 in the AICPA publication linked above)
However, on sale of BTC in the future, the difference between carrying value (reflecting any impairments) and sale proceeds will be recognized as “profit”.
Thus, if fair market value has increased but not carrying cost, Tesla would recapture the difference between FMV and carrying cost in additional profit on the sale.
Implications of Accounting Rules
It would be interesting to see if Tesla or any of its senior officers announce BTC initiatives or tout BTC when the price of BTC appears in “danger” of declining below the carrying value in Tesla’s financials: US$ 31,621.36 as of 31 March 2021.
It will also be interesting to see if Tesla conducts any additional sales to offset any future impairments.
March 2021 BTC Sale
The Scenario #1 and Scenario #2 estimates for the number of BTC sold are very close. So let’s use the arithmetic average of both. That’s 4,466.64.
Using this number, the average price received on the March sale was roughly US$ 60,895.95. US$ 272 million divided by 4,466.64.
If you look at the Yahoo Finance historic prices for BTC, you’ll see several days that might be candidates for a sale, e.g. March 14th.
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