Toronto - In the run-up to the introduction of accounting standards for the reporting of cryptocurrency, companies took various approaches to disclosing their involvement with the novel exchange medium. Investors had to rely more on contextual narrative explanations about a company's crypto involvement instead of getting it from numerical data.
An analysis of reporting from five major companies as cryptocurrency went on a popularity rollercoaster between late 2018 and the so-called "crypto winter" of late 2022 showed firms increased the frequency and readability of their crypto disclosures when cryptocurrency was riding high but reduced them when markets were less favourable.
"To effectively 'sell' investors on complex issues, such as cryptocurrency activities, firms may intentionally simplify or "dumb down" the information," said researcher Ramy Elitzur, a professor of accounting at the University of Toronto's Rotman School of Management. "When market conditions are favourable, firms emphasize or actively promote their involvement in these activities. Conversely, during downturns, firms strategically distance themselves to avoid negative associations or heightened scrutiny."
Prof. Elitzur and fellow Rotman accounting and finance professor Wendy Rotenberg applied artificial intelligence methods to help them examine financial disclosures for GameStop, Tesla, MicroStrategy, Coinbase and PayPal. Some, such as Tesla, used cryptocurrency primarily as a financial asset or means of customer payment. Coinbase and PayPal worked mostly on the "supply side," providing trading services or selling cryptocurrency to customers.
Besides looking at the five companies' corporate data, the researchers used Google Trends to gauge the level of public interest in companies and their cryptocurrency activities and compared that to tracking of Bitcoin prices. They applied well-established readability tests to the companies' disclosures as well as machine-learning tools to analyze text.
GameStop "consistently" showed the highest quality disclosures on average with much more detail given, said Prof. Elitzur. On the other hand, disclosures by MicroStrategy -- now known as Strategy -- were consistently ranked below average for readability compared to the other companies, he said. That company has since been named in a class action lawsuit over allegations it made false or misleading statements to investors and did not disclose certain negative information about the business. "It's not surprising that unclear or less transparent disclosure practices could contribute to legal challenges or investor dissatisfaction, as seen in this lawsuit," Prof. Elitzur said.
There was limited guidance on how to disclose a firm's crypto activities until late 2023 and what there was led to significant gaps between the reported value of a company's digital assets and what those would fetch on the market. Then the U.S. Financial Accounting Standards Board released its ASU 2023-08. It stated that cryptocurrency should be reported according to its fair market value with corresponding changes reported in income. The standards made things clearer but also brought more volatility in earnings reporting for companies more heavily invested in crypto as an asset.
Even with the clarity brought by ASU 2023-08, the researchers say their work shows there's room for even tighter regulation so that investors get better quality information.
"Our findings suggest that reporting standards regarding cryptocurrency activities should be refined further by introducing more concrete and explicit disclosure requirements than those currently outlined in ASU 2023-08," said Prof. Elitzur.
The study was recently published in the Journal of Alternative Finance .
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