Coinbase could face regulatory challenges when it comes to complying with new FASB accounting rules that shift crypto accounting and disclosure to a fair value model from a no-cost impairment model, so MarketWatch reported on June 24, citing accounting experts.
The rules were agreed to by the FASB in 2023 and will officially go into effect in 2025. However, companies are allowed to 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 recording their most recent value rather than treating them as intangible assets, which has been the standard practice. This change was prompted by requests from companies like MicroStrategy and Tesla, which hold significant amounts of volatile crypto.
Under the previous model, companies were required to record digital assets at their historical purchase prices and assess them for impairment each reporting period, recording any declines in value but not recognizing subsequent increases. The new rule allows companies to revalue these assets at a fair market value, more accurately reflecting gains and losses.
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 corporate profits.
Companies often limit such volatility by using non-GAAP measures in their financial reports. However, these should not provide customized statistics. Usvyatsky argued that Coinbase has done just that.
Non-GAAP adjustments
Before adopting the new rule, Coinbase excluded cryptocurrency depreciation costs from its adjusted EBITDA reconciliation. After implementing the rule, the company eliminated fair value volatility, which Usvyatsky said is also a form of custom accounting because it omits normal, recurring operating expenses.
Coinbase has classified its crypto into four new items on its balance sheet: for investments, for 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 adjust gains and losses on cryptocurrencies held for investments, arguing that they do not represent normal, recurring operating expenses necessary for its operations.
According to Usvyatsky, the SEC has previously challenged companies’ non-GAAP adjustments, most notably by sending letters to Bit Digital and MicroStrategy asking about similar impairment deletions in financial reports.
The SEC’s December 2021 follow-up letter to MicroStrategy ordered the company to remove “adjustment for Bitcoin impairment in… non-GAAP measures” in future filings.
Others downplayed the risk of fallout. Dig author Francine McKenna told the newswire that the stock market is following “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 writing.