Being included in the S&P 500 is not a dream! Benchmark: New accounting standards will significantly boost MicroStrategy's earnings

According to the Zhitong Finance and Economics APP, a Benchmark report states that adopting new accounting standards may change the game rules for MicroStrategy (MSTR.US), the largest holder of Bitcoin. This move could significantly increase the software company's earnings and give it the opportunity to join the S&P 500 Index.

Benchmark analyst Mark Palmer pointed out that since MicroStrategy began holding Bitcoin on its balance sheet in 2020, the company has accumulated $2.27 billion in impairment losses due to US financial accounting standards. As of March 19, MicroStrategy holds 214,246 Bitcoins, valued at $13.6 billion based on last Friday's afternoon price.

Under US financial accounting standards, companies treat cryptocurrencies as indefinite-lived intangible assets, similar to trademarks, copyrights, and other rarely traded items. Therefore, companies record cryptocurrencies at the prices they paid for them and review asset impairments quarterly. Even if the price of cryptocurrencies temporarily drops during the reporting period, the held assets are considered impaired, and their value cannot be upwardly adjusted if prices recover.

However, last year, the US Financial Accounting Standards Board proposed new accounting standards that allow companies to immediately recognize gains and losses and classify crypto assets as financial assets. The new rules will take effect on January 1, 2025, but companies can choose to adopt them early.

Palmer stated that for MicroStrategy, the earnings impact "will be huge: the company estimates in its 2023 10-K report that adopting the new accounting standards earlier will increase its retained earnings balance by approximately $3.1 billion at the beginning of 2024."

MicroStrategy is scheduled to announce its first-quarter 2024 results after the US stock market closes on April 29. Analysts on average expect the company to report an adjusted loss of $0.13 per share for the first quarter, compared to a loss of $5.62 per share in the previous quarter and $30.59 per share in the same period last year. The significant fluctuations in MicroStrategy's earnings align with the volatility of Bitcoin prices. Palmer believes that if MicroStrategy chooses to adopt fair value accounting standards early, earnings per share for the first quarter could exceed $300.

"However, we also believe that tax implications associated with adoption may cause MicroStrategy to delay choosing this option," he added.

The report states that due to MicroStrategy's strong stock liquidity, with a market capitalization exceeding $18 billion and 50% of its shares available for trading, the company meets almost all the requirements for inclusion in the S&P 500 Index. Another criterion considered by the S&P Dow Jones Indices Committee for including a stock in the S&P 500 Index is that the company has positive earnings in the most recent quarter. However, as Palmer pointed out, MicroStrategy has reported losses in 10 out of the past 14 quarters However, MicroStrategy adopted the new accounting standards earlier to meet this requirement.

The report stated: "Being included in the S&P 500 index will continue to boost MicroStrategy's stock valuation, as a large amount of passive funds will flow in."