Accounting for the nonzero asset corporation. The MPEx standard.

Tuesday, 02 July, Year 5 d.Tr. | Author: Mircea Popescu

0. This introduces the accounting rules for Bitcoin public companies.

Such accounting rules are proper and necessary, because :

  • Bitcoin is fundamentally and structurally different from all fiat currency of all sorts and types, either currently or historically in existence.
  • The currently accepted patchwork of contradictory, whimsical and occasionally nonsensical fiat accounting standards (GAAP, IFRS, etc) are either useless or overly complicated for most BTC applications.
  • There exists no authority capable of Bitcoin taxation. Consequently, all the subterfuge and nonsense induced in fiat accounting by this scourge upon humanity needs not be replicated in Bitcoin.i

This accounting scheme is intended to be :

  1. Clear and concise. Reading the statements of the average public company should not require the interested party more than one hour, provided the interested party is literate.
  2. Simple and flexible. Preparing the statements of the average public company for publication should not require the interested party more than one workday, provided the interested party is qualified.
  3. Sensible and straightforward. The literate person of 100 IQ should be able to learn the entire scheme within a week, and be ready to correctly apply it from there on.
  4. Unambiguous. Absolutely any situation that may be encountered in practice is to be described exactly one way in the accounting system. The possibility available of reducing to the absurd any alternative notation.

Needless to say that none of these constraints are currently met by any sort of "generally accepted" set of accounting principles or regulations.

I. The accounting system.

1. The accounting period may be either one week or one month, at the option of the corporation. Purely financial ventures may opt for weekly reporting, but in the case of corporations with any operational activity at all the standard is one month.

2. All statements are to include the statement of incoming and outgoing BTC during the period, listing at the minimum the sum incoming or outgoing and a brief description. To simplify auditing it is recommended that corporations use one single Bitcoin address for all their incoming, and that they resend the entirety of their BTC to that address at the end of each period.

3. All statements are to include a statement of corporate accounts listing start, net change and end positions for each of them, as well as totals. The total liabilities must match total assets on the book.

The assets account plan consists of three accounts :

  1. Cash, including BTC balances held and cash equivalents, defined as any instruments that are normally expected to be exchangeable for cash within 24 hours.ii
  2. Tangibles, including any and all assets that could reasonably be expected to be exchangeable for BTC, even if at a loss.
  3. Intangibles and goodwill, including any and all expenditures that could not be reasonably expected to be exchangeable for BTC on their own.

The liabilities account plan consists of two accounts :

  1. Notes. If the company borrows from a third party in any shape or form, the entire value (principal and interest) is included.iii
  2. Shareholders' equity, defined as the net difference between the total assets and the sum of other liabilities.

Accounts may be omitted if nil.iv

4. All statements are to include a statement of the total authorised shares outstanding and account for issuance and treasury holdings. All statements are to report a par value per share both in the "all accounts" version and in the "cash + tangibles" version.

5. All statements are to include a forward looking statement from the management, with regards to next term revenue.

6. All statements are to include a table of outstanding stock warrants, if any, composed of an itemised list of each warrant with its share count, BTC value and par. The table will also include a totalisation row, with the average par.

II. Using the accounting system for reporting.

1. During the entire month you keep a runner of all your expenditures and all your income. You don't need to sum or sort anything, you just publish this runner at the end of the month.

2. You copy your previous interval end account positions as your start positions for the current interval. You check your BTC and enter it as your end position. You go through the incoming list and add all incoming BTC to the cash net change position. You go through the outgoing list and substract all outgoing BTC from the cash net change position. You check that the start + change = end. If this equality is not satisfied you hunt for the missing element in your list until you find it. If you can't find it you report this. In no case do you cook the books to suit.

3. You go through the outgoing list and sort the expenses into tangible and intangible. Every time you buy something of definite value or which can be negotiated for a price you have bought a tangible in this context. Every time you pay for something which has no definite value outside of the value you assign itv you have bought an intangible.

4. You go through the list of tangibles and assign an amortisationvi horizon and an amortisation plan for them. The standard amortisation flows in 12 equal parts during the course of one year. If you intend to use a different model you make a statement of this, detailing your reasoning.

5. You apply any amortisation to your already existing tangibles, according to the plan you declared at the time they were introduced in the accounts. Your start tangibles plus your current tangible purchases minus amortisations is your end tangibles position. You list the net change for convenience. Your start intangibles plus your current intangible purchases plus amortisations is your end intangibles position. You list the net change for convenience.vii

6. You list the total shares outstanding, conveniently detailing how many were issued and when, how many were bought by the company (treasury shares) and when. You calculate your cash + tangibles and your all accounts positions and report each as a per share value.

7. You prepare as best you can, drawing on all your knowledge of your business and your field, a forward looking statement of revenue for the next period. Should such statements prove wrong in retrospect you've committed no crime, it happens. If it happens a lot it does mean you suck as a manager, but it does not mean you're dishonest. There's a huge difference between these two, as suckage you can fix but dishonesty you can not fix.

8. You publish your stock warrants table, if you have issued such things. Just to be on the safe side you make any mentions of anything and everything you in your conscience consider might still be necessary for an unrelated third party to correctly and fully evaluate the state of your corporation. To keep balance consider the mutually exclusive interests of brevity and completeness : having left the water running is a small thing when compared to the size of the house, and after all water runs all the time in any house. Nevertheless, if the stopper is also in, the TV tuned on Creek Channel and your roommate tired you won't omit mentioning the water as you leave for work.

III. Using the accounting system for judging corporations.

1. Are the accounts actually balanced ? Do the numbers add up ? If not, perhaps the corporation would be better served sending its officers back to school for equivalence degrees. Or perhaps something was just overlooked and you can help.

2. Do the expenses make sense ? Are the prices paid reasonable ? Does the revenue make sense ?

3. What is the quality of the tangibles account ? Does it include a lot of crude oil in storage or is it mostly costume jewelry ? What is the quality of the intangibles account ? Does it mostly consist of judicious expenditures or is it principally made up of blown deals such as investments gone bad ?

4. What is the evolution of this business over time ? What can we glean about the officers from it ?

It is ultimately your job to put either a discount or a premium on the accounts of the company and compute your very own per share value. Based on this you may then buy public companies that are under your evaluation and sell those which are over it, calling yourself an investor for cause, and not merely on the grounds that you liked the sound of the words.

IV. Miscellanea

This accounting system is optional for MPEx listed companies all through 2013. It will become mandatory in 2014, either in its present form or as restated prior to January 1st 2014.

This accounting system may be referred to as MPEx-AN0-v1 or AN0 for short.

This accounting system is not intended for zero asset corporations, which distribute their net profit each month to shareholders. These will continue on the S.MPOE model.

You can review an example of this system at work here.

———
  1. The best example is perhaps the notion of amortisation, which has been completely redefined. []
  2. Note that holding large volumes of illiquid shares does not qualify as cash - only the portion of the position inferior to a tenth of the average daily volume of the symbol during the previous month may be accounted as cash, and only at the average price during the previous month. Instruments not listed on an approved exchange may not be counted as cash at all. []
  3. If company A borrows 100 BTC at 5% compounding for one year the sum included will be 179.58563260, ie 100×1.05^12. If company A borrows with interest but without term the sum included will be quoted as "infinity", and the accounts will balance with 0 shareholder equity. []
  4. Note that an officer diminishing the corporate cash position to pay "debts" not listed as Notes is comitting a serious offense. []
  5. Such as for instance advertising, as someone can't very well buy for their own use the advertising you've done for your own company ; such as for instance an electricity bill, as someone can't very well buy from you the electricity you've already used. This does not mean these expenses are a waste or that the items acquired are useless - it just means that the only way to extract their value is to buy your whole company, as they can't be traded on their own account. []
  6. Please be aware that the BTC notion of amortisation has absolutely nothing in common with the fiat version. For a discussion of this point please see this log. []
  7. Note that financial instruments gone sour (exchange disappeared, asset delisted, issuer dissapeared etc) will have to be moved to the intangibles account. You can't carry on your tangibles account financial instruments that aren't listed on an approved exchange, no matter how good your personal relation with the issuer or your estimation of his industry. []
Category: MPEx
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17 Responses

  1. David FRANCOIS`s avatar
    1
    David FRANCOIS 
    Tuesday, 2 July 2013

    Oh, and statements should be signed.

  2. Mircea Popescu`s avatar
    2
    Mircea Popescu 
    Tuesday, 2 July 2013

    That's actually a great point. They should be.

  3. David FRANCOIS`s avatar
    3
    David FRANCOIS 
    Tuesday, 2 July 2013

    Zero assets corp. can mathematically not exist, zero assets = zero liabilities = zero capital = zero shareholders = no company.

    That is if you assume a balance sheet that sums to zero and shares that must have a > 0 nominal value.

    I'd be interested in a few examples to see what exactly you mean.

  4. Mircea Popescu`s avatar
    4
    Mircea Popescu 
    Tuesday, 2 July 2013

    The zero asset corp is an accounting fiction introduced last year to serve a certain set of Bitcoin needs. It proceeds from the twin observations that a BTC corporation's assets are essentially at the disposal of the management, shareholders forcing recovery being in most cases impractical (the same observation that has led to the no-voting rights shares on MPEx) on one hand and that holding BTC balances and in general any sort of BTC-assets is a risk (the same risk that constitutes the yet ununderstood by the public cost of book).

    For these principal reasons it makes perfect sense to construct the zero assets company, which simply distributs the totality of BTC it nets to shareholders. Low maintenance sorts of items like the various dice sites and S.MPOE itself are best organised under such a scheme (the particular manner in which S.MPOE manages to provision capital to cover its book in spite of not carrying any assets is both clever and fertile, just-dice for instance uses a model derived from that).

  5. David FRANCOIS`s avatar
    5
    David FRANCOIS 
    Wednesday, 3 July 2013

    The topic is quite interesting and, I think, deserves to be discussed at length.

    There are a couple of things that bother me with your model.

    Let's first examine a couple of things somehow implied by your two examples :

    For S.MPOE, you manage to simplify the whole thing, but you introduce the concept of a lender of last resort, which works well in the fiat world, and maybe in BTC world too, but only in the context of a perfectly spherical cow.

    Let's then switch the perspective. I have an MPEx account holding some BTC. To me it's an asset (even if you do some trust ponderation magic), and to MPEx it's (hopefully) considered a liability, which should be accounted for on the liabilities side, balanced by the cash asset. Which in turn allows MPEx's management to put this money to work as it sees fit (not sure it's allowed per the contract though).

    Even if you must rely on the management's integrity you may still want to have a clear and transparent record of everything that's done with the money in order to easily see when something fishy is being done. And as added benefit the balance sheet could come with a set of cryptographic signatures showing control of the reported cash assets.

    Second example, S.DICE. S.DICE needs a BTC stash to function. The more you have, the better, but anyway, the argument works for any positive number. So you have a stash of BTC, two options here :
    - It belongs to S.DICE
    - It belongs to someone else

    If it belongs to S.DICE it's a cash asset balanced by capital (automatically giving the shares a nominal value btw), therefore assets.

    If it doesn't it means it's borrowed, therefore liability, therefore assets.

    Leaving the examples aside, let's go back to the reasons, they're twofold if I read correctly, I'm not really sure about what you mean by the latter. How does not putting a BTC stash on the assets side of a balance sheet make it less of a risk to hold?

    As for the former, you take the premise that management has absolute control over the assets with pretty much no responsibilities and conclude from there that accounting for them is pointless. You forget that accounting is about transparency, better transparency allows the market to price the asset better. So following this reasoning, if the management fucks up, the market punishes it by dropping the asset's valuation. The more shares the management has, the more punished it gets. And more importantly, by a perfectly fair system, where it fucking hurts.

  6. Mircea Popescu`s avatar
    6
    Mircea Popescu 
    Wednesday, 3 July 2013

    The topic is quite interesting and, I think, deserves to be discussed at length.

    I agree!

    of a perfectly spherical cow.

    I'm glad to see teh French also use this purely Romanian joke (of course, in Romanian the chicken is spherical).

    To explain the entire zero asset corporation notion I have to make reference to the state of Bitcoin finance cca 2012. In the context of idiots like Nefario leading a bunch of forum muppets into pure nonsense distilled out of chav Icandoism it was a huge, humongous step forward. Among saner, more literate and more experienced people it's just a historical throwback.

    It is however a historical throwback that has worked remarkably well in competent hands (MPOE is and in likeliness will remain for the lifetime of Bitcoin the longest continuously public company), and so it may have some value in some circumstances. I fully agree however that it can't be the only model available, as the requirements put on the competence of the hands does indeed approach the requirements of a spherical barnyard animal (and a fine example of this problem would be the recent trouble Erik caused - I believe innocently, as in, he didn't at any point realise the issue'd be contentious until a day or two after seeing the public reaction).

    MPEx’s management to put this money to work as it sees fit (not sure it’s allowed per the contract though

    It's not done anyway. As things stand right now the following bits of magic happen :
    - the cost of book on your deposit is annulled. This means that whatever costs MPEx incurs safeguarding your balance are for convenience taken as zero. You are perhaps in a great position to know that nonzero expenditure in this direction does not in fact prove sufficient in plenty of cases. This magic is to a large degree supported by design and architecture choices, but it is nonetheless magic.
    - the available cash is not swept in any sort of profit generating scheme of any kind. Originally I was toying with the idea of offering an interest on balances on this basis (this was available for a short period last summer), but two factors broke that. One was the macroeconomic distortion induced by this, which at the time was significant but perhaps today with the growth of sensible ofshots of the principle like just-dice may not be such a big issue anymore (although I think this is a premature consideration, a lot more solid interest paying ventures are needed). The second and perhaps as important was the horrible performance of profit earning schemes, as typified by the 2 month lifespan of Bitcoin's first and so far only CDO offering.

    in order to easily see when something fishy is being done.

    It's my policy to excise the problem entirely in any circumstances where enforcing is difficult and establishing the truth takes time and skill. This is why MPEx shares are nonvoting : it'd be absolutely impossible to collect a set of shareholders that can actually on average think to the level required to pass the maturity examinations if you allow pass-throughs. Even if they somehow managed to think rather than create 500 page threads of pure nonsense, supposing they'd reach some sort of valid consensus what exactly'd they do ? "go after pirate" ? The situation here is similar, in that I have absolutely no faith that the confederacy of dunces posing as "the community" has the werewithal to correctly assess Bitcoin movements. Consequently, a depositor is entitled to his deposit on my guarantee, and the system is not constructed so that he may account for underlying movements. This may be said that it also has the advantage of privacy, in a certain definition of privacy.

    How does not putting a BTC stash on the assets side of a balance sheet make it less of a risk to hold?

    This is easily explained taking the situation of S.DICE. If its stash is owned by the shareholders but controlled by the management, an untenable situation occurs whereby should the management declare the stash lost the shareholders have no actual means to verify this fact, and for this reason will simply view any loss of stash as theft, regardless if it is theft or negligence. This puts the operator in the position of having to replenish the stash of his own account (as either avenue brings in his strict liability), which then reduces the entire thing to the stash simply being owned by the management. Therefore, it makes no sense to pretend : the stash is owned by management and as such it has no place on the company balance sheet.

    So : it's not that it makes it less of a risk to hold, it's that it makes it a risk to hold to the people actually holding it, which can't be the company.

    As for the former, you take the premise that management has absolute control over the assets with pretty much no responsibilities and conclude from there that accounting for them is pointless.

    In some cases this is actually true. These cases are typified by a service of high specialisation offered through a server. The server has to be under management control. The BTC has to be under management control. These are all the assets. What'd you put on the book of just-dice, for instance, goodwill ?

    Not to say that this model is the only one or in any way obligatory for anyone. It is in fact, as said afore, a heavy burden to implement requiring nigh-on godly abilities of foresight and comprehension on the part of management, which makes it uniquely inadequate for most applications. Out of this need to make BTC company management more accessible to the common man, coupled with the blessed march of history which has certainly dispersed the crowd, in such a way that while the average has not moved the sane are now more numerous than before, the AN0 was born.

  7. Pls stop spellin' tha name is caps tho. John Doe won't become anything further than avg John Doe is IT'S FUCKING DOE CAPS THO.

  8. There are two II, it's missing a III.

    Also I agree with Vexare. It's a French administrative syndrome.

  9. Mircea Popescu`s avatar
    9
    Mircea Popescu 
    Tuesday, 29 April 2014

    A ty. I left out a stroke.

  10. Random question: did smickles inspire any of this method from his accounting practices?

  11. Mircea Popescu`s avatar
    11
    Mircea Popescu 
    Monday, 2 June 2014

    I wrote it, how would have smickles inspired it ? You got your agents mixed up in there.

  12. Very good article. This is something that all public Bitcoin companies should adopt or strive for.

  13. Mircea Popescu`s avatar
    13
    Mircea Popescu 
    Wednesday, 4 June 2014

    Cheers.

  1. [...] Vexare Pls stop spellin’ tha name is caps tho. John Doe won’t become... [...]

  2. [...] accounting rules are proper and necessary, because Bitcointalk investing is fundamentally and structurally different from [...]

  3. [...] Mircea Popescu A ty. I left out a stroke. [...]

  4. [...] Compare this fucktardation with MPEx, which has an order book (!), publishes volumes (!), has solved HFT,vi and publishes monthly reports using a fairly revolutionary accounting methodology: MPEx-AN0-v1. [...]

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