Regulation
Coinbase Could Face Regulatory Challenges Over So-called “Customized Accounting Measures” Under New FASB Rules
Coinbase could face regulatory challenges regarding its compliance with new FASB accounting rules that shift cryptocurrency accounting and disclosure to a fair value model from a no-cost, no-impairment model, MarketWatch reported. June 24quoting accounting experts.
The rules were agreed to by the FASB in 2023 and will officially take effect in 2025. However, companies are allowed to adopt the standards sooner, and some, including Coinbase, have already done so.
New accounting rules
The new standards aim to provide a more accurate valuation of digital assets by capturing their most recent value rather than treating them as intangible assets, as was standard practice. This change was driven by demands from companies like MicroStrategy and Tesla, which hold significant amounts of volatile crypto.
Under the previous model, companies had to record digital assets at their historical acquisition price and assess their depreciation each reporting period – recording any decline in value but not accounting for subsequent increases. The new rule allows companies to revalue these assets at fair market value, thereby more accurately reflecting gains and losses.
Olga Usvyatsky, former vice president of research at Audit Analytics, noted that while the new rule provides investors with more useful information for making decisions, it also introduces volatility into company earnings.
Companies often mitigate this volatility by using non-GAAP measures in their financial reports. However, these should not create custom measures. Usvyatsky argued that Coinbase did precisely that.
Non-GAAP adjustments
Before adopting the new rule, Coinbase excluded crypto depreciation costs from its Adjusted EBITDA reconciliation. Following the adoption of the rule, the company excluded fair value volatility, which Usvyatsky said is also a form of bespoke accounting because it omits normal, recurring operating expenses.
Coinbase has classified its crypto into four new items on its balance sheet: for investment, operational purposes, borrowed crypto, and collateral for loans. These assets are carried at fair value, with variations in how this value is determined affecting the gains or losses recognized when market values change.
The company also revised its definition of adjusted EBITDA to account for gains and losses on cryptocurrencies held for investment purposes, arguing that these do not represent normal, recurring operating expenses necessary to his activity.
According to Usvyatsky, the SEC has previously challenged companies’ non-GAAP adjustments, including sending letters to Bit Digital and MicroStrategy inquire about similar write-offs in financial reports.
The SEC’s follow-up letter to MicroStrategy in December 2021 ordered the company to remove the “adjustment for Bitcoin impairment charges in… non-GAAP measures” in future filings.
Others downplayed the risk of consequences. Dig author Francine McKenna told the newswire that the stock market “follows the best advice its billions can buy” from Big Four accounting firm Deloitte, which is unlikely to mislead the company.
Coinbase did not respond to CryptoSlate’s request for comment at the time of publication.