A growing number of companies invest in Bitcoin but none to the extent of MicroStrategy Inc., which in 2021 announced that buying and holding the volatile digital asset was a core business strategy.

The rare prominence of Bitcoin in the enterprise software company’s mission and the size of its holdings put the Tysons Corner, Va.-based business in a class of its own. That distinction led to the SEC singling out the company among its brethren Bitcoin enthusiasts and rebuking how it used non-GAAP measures, or measures that don’t comply with U.S. generally accepted accounting principles, to convey how the digital currency affected its earnings, financial reporting experts say.

The market regulator objected to the company using unofficial, using non-GAAP measures to strip out the extreme fluctuations of Bitcoin in measures it touted to investors, comment letters made public last week show. For a company that sees Bitcoin as a central part of its business, that’s a clear violation of Securities and Exchange Commission rules that warn companies to use these measures sparingly and for one-off transactions, said Robert Rostan, CFO of Training the Street, an accounting education company.

“It’s illogical and borderline egregious,” Rostan said. “You can’t on the one hand say, ‘It’s a core part of our business but on the other hand, when you evaluate our results you should exclude this because it’s not core to our business.’ It’s saying two different things.”

MicroStrategy, which has not responded to requests for comment, will comply with the agency’s directive and not exclude cryptocurrency impairments in future filings, the company wrote to the SEC.

Companies are allowed to use measures that don’t comply with GAAP to weed out unusual, one-time expenses or to show their performance in a way the rules don’t fully capture. The most common non-GAAP metric is Earnings Before Interest, Taxes, Depreciation, and Amortization, or EBITDA. Companies aren’t allowed, however, to let non-GAAP measures overshadow official results.

There is no piece of U.S. GAAP accounting that spells out how companies should account for digital currencies. In the absence of official rules, businesses that don’t qualify as investment companies follow guidance from the American Institute of CPAs that treats Bitcoin as an intangible asset, as outlined in ASC 350. This means cryptocurrency gets recorded on company balance sheets at historical cost and its value only gets revised when it dips, never when it recovers.

Few people are fans of this accounting treatment because it only revises Bitcoin value downward. U.S. rulemakers are considering changing the rules. But the accounting right now is what it is.

If a company offers “tailored” accounting to investors — taking official rules and reversing them or changing them in some way — that can run afoul of SEC guidance, said Mark Shannon, partner in Crowe LLP’s national office and a former associate chief accountant at the SEC’s Division of Corporation Finance.

The SEC zeroed in on this in its correspondence with MicroStrategy.

“They say ‘You have created a non-GAAP measure that reverses what GAAP tells you to do, which is to take impairment losses,” Shannon said. “It’s as simple as that.”

The SEC reviews the filings of public companies at least once every three years and asks formal, written questions. Once a company has a chance to respond and the SEC agrees, the regulator closes the file and makes all correspondence public about 20 business days later.

For the quarter ending Sept. 30, 2021, MicroStrategy reported a net loss of $36.1 million. Adding back in its share-based compensation expense and the impairment of its digital assets made the company’s unofficial, or non-GAAP, income flip to $18.6 million, its filing shows.

Tesla Inc., the company with the second biggest holding of Bitcoin on its balance sheet after MicroStrategy, did not undo the effect of a $51 million cryptocurrency impairment in its third-quarter earnings. Tesla purchased $1.5 billion of Bitcoin in 2021.

Other companies, including Coinbase Inc. and Square Inc., use non-GAAP measures to strip out the effect of impairments of digital currencies, filings show. These companies have smaller holdings of Bitcoin compared to MicroStrategy, however.

Still, companies that invest in Bitcoin and use non-GAAP measures to convey their value should pay attention to the SEC’s communication to MicroStrategy and “tread lightly,” said Nerissa Brown, associate professor of accounting at the Gies College of Business at the University of Illinois.

“These comment letters do set the tone,” Brown said. “This is a signal if you’re holding these types of assets, and we know everybody is facing losses right now, so don’t be backing them out.”