Coinbase, a popular cryptocurrency exchange platform, is potentially facing regulatory challenges due to its compliance with new Financial Accounting Standards Board (FASB) accounting rules. These new rules shift the accounting and disclosure for cryptocurrencies to a fair-value model from a cost-less-impairment model, according to a report by MarketWatch. The FASB agreed upon these rules in 2023, and they are set to officially take effect in 2025. However, firms have the option to adopt the standards early, and some, including Coinbase, have already done so. The primary goal of these new standards is 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.
One of the potential implications of these new standards is the introduction of volatility into company earnings. Olga Usvyatsky, a former vice president for research at Audit Analytics, pointed out that while the new rule provides investors with more useful information for decision-making, it also introduces volatility into company earnings. Companies often use non-GAAP measures to mitigate such volatility in their financial reports. However, it is crucial that these measures do not create individually tailored metrics. Usvyatsky argued that Coinbase may have done just that by excluding crypto impairment costs from its adjusted EBITDA reconciliation before adopting the new rule and later excluding fair-value volatility, which she contends is another form of tailored accounting. This exclusion omits normal, recurring operating expenses from the financial reports.
Coinbase has categorized its crypto assets into four new items on its balance sheet: for investment, for operational purposes, borrowed crypto, and collateral for loans. These assets are accounted for at fair value, with variations in how this value is determined affecting the gains or losses recorded when market values change. The company has also revised its definition of adjusted EBITDA to account for gains and losses on crypto held for investment, arguing that these do not represent normal, recurring operating expenses necessary for its business. This revised approach could potentially raise concerns among regulators, especially considering the SEC’s past challenges to firms’ non-GAAP adjustments.
The Securities and Exchange Commission (SEC) has previously challenged firms’ non-GAAP adjustments, as seen in its letters to Bit Digital and MicroStrategy inquiring about similar impairment removals in financial reports. In December 2021, the SEC issued a follow-up letter to MicroStrategy, ordering the company to remove adjustments for Bitcoin impairment charges in non-GAAP measures in future filings. Despite these regulatory challenges, some market observers like author Francine McKenna suggest that Coinbase may be “following the best advice its billions can buy” from Big Four accounting firm Deloitte, implying that the exchange might be well-advised and may not face significant consequences for its accounting practices.
Coinbase’s compliance with the new FASB accounting rules could potentially lead to regulatory challenges, especially concerning the handling of crypto assets and the use of non-GAAP measures. While the company may have made adjustments to align with the new standards, regulators and market observers will likely continue to scrutinize its financial reporting practices to ensure transparency and compliance with accounting regulations.