Tesla reflected a $112 million valuation loss in the second quarter due to falling cryptocurrency prices this year. Even without selling the assets it holds, fair-value measurement meant the loss was reflected in accounting results, reducing net profit.

On July 23 local time, blockchain media outlet CryptoSlate reported that Tesla reflected a $112 million pretax cryptocurrency valuation loss in the second quarter. After tax, net income attributable to common shareholders fell by $87 million and earnings per share declined by $0.02.

Tesla's second-quarter shareholder update put the carrying value of digital assets at $674 million as of June 30. That was down from $786 million at the end of March. The decline reflected end-of-quarter fair-value measurement regardless of whether any assets were sold.

The key is the accounting treatment. Under the Financial Accounting Standards Board's cryptocurrency accounting standard, a company's digital assets are revalued at fair value each quarter and price changes are immediately reflected in net income. That means unrealised gains arise when prices rise and unrealised losses occur when prices fall. Even without selling cryptocurrencies, price moves alone can change reported performance in the income statement.

The loss was not reflected in adjusted results that show cash-generating capacity. Tesla added back the $112 million cryptocurrency valuation loss when calculating second-quarter adjusted EBITDA and presented a total of $3.27 billion. That reflected a view that the loss affected accounting net income but did not involve an actual cash outflow.

Markets are also focused on any change in the size of Tesla's bitcoin holdings. Based on disclosures at the end of March, Tesla held 11,509 bitcoins acquired for $386 million. But the second-quarter shareholder materials did not include the number of bitcoins held or whether any were sold. As of July 23, Tesla's investor relations page also had not yet posted the quarterly report on Form 10-Q.

It has not been confirmed whether the decline in carrying value was due to a valuation loss from a fall in bitcoin prices or due to some sales. The industry is watching whether the formal quarterly report to be released later will disclose the number of bitcoins held and transaction details.

Given the scale of its assets, Tesla's cryptocurrency exposure is limited. Digital assets of $674 million at the end of the second quarter amounted to about 0.45 percent of total assets of $148.52 billion. Unlike companies that manage bitcoin as a core financial asset, Tesla holds cryptocurrencies as only part of its overall assets.

Still, as an asset with high price volatility, it is having a significant impact on quarterly results. In the fourth quarter last year, Tesla reflected about $600 million in valuation gains under the same fair-value accounting standard, lifting net profit. Under the same accounting rule, rising prices improve results while falling prices become a source of losses.

As a result, if Tesla continues to present adjusted EBITDA in the same way, cryptocurrency price changes are likely to be reflected in U.S. GAAP net income but continue to be excluded from adjusted results.