Regulation
Coinbase could face regulatory challenges over alleged “bespoke accounting metrics” under new FASB rules
Coinbase could face regulatory challenges over its compliance with new FASB accounting rules that shift cryptocurrency accounting and disclosure to a fair value model from a lower-cost model, MarketWatch reported June 24thciting accounting experts.
The rules were agreed upon by the FASB in 2023 and will officially take effect in 2025. However, companies can adopt the standards early, 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 has been the standard practice. This change was prompted by requests from companies like MicroStrategy and Tesla, which hold significant amounts of volatile cryptocurrencies.
Under the previous model, companies had to record digital assets at historical acquisition prices and assess any losses in value over each reporting period, recording any decreases in value but not recognizing subsequent increases. The new rule allows companies to revalue these assets to fair market value, reflecting gains and losses more accurately.
Olga Usvyatsky, former vice president for 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 such volatility by using non-GAAP measures in their financial reports. However, these do not have to create custom metrics. Usvyatsky argued that Coinbase did just that.
Non-GAAP adjustments
Before adopting the new rule, Coinbase excluded cryptocurrency depreciation costs from its adjusted EBITDA reconciliation. Following the adoption of the rule, the company excluded fair value volatility, which Usvyatsky argues is also a form of bespoke accounting, as it omits normal recurring operating expenses.
Coinbase has classified its cryptocurrencies into four new items on its balance sheet: for investment, for operational purposes, borrowed cryptocurrencies and collateral for loans. These assets are accounted for at fair value, with changes in how that value is determined, which affects 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 for its business.
According to Usvyatsky, the SEC has already challenged the companies’ non-GAAP adjustments, notably by sending letters to Bit Digital and MicroStrategy request information on similar impairments in financial reports.
The SEC’s follow-up letter to MicroStrategy in December 2021 ordered the company to remove “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 exchange is “taking the best advice its billions can buy” from Big Four accounting firm Deloitte, which is unlikely to cheat the company.
As of this writing, Coinbase has not responded to CryptoSlate’s request for comment.