Coinbase could face regulatory challenges over alleged ‘tailored accounting metrics’ under new FASB rules

Coinbase could face regulatory challenges over its compliance with new FASB accounting rules that shift the accounting and disclosure for crypto to a fair-value model from a cost-less-impairment model, MarketWatch reported on June 24, citing accounting experts.

The rules were agreed upon by the FASB in 2023 and will officially take effect in 2025. However, firms 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 capturing 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 had to record digital assets at their historical acquisition prices and assess for impairment each reporting period — recording any decline in value but not recognizing subsequent increases. The new rule allows companies to revalue these assets at 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 must not create individually tailored metrics. Usvyatsky argued that Coinbase has done precisely that.

Non-GAAP adjustments

Before adopting the new rule, Coinbase excluded crypto impairment costs from its adjusted EBITDA reconciliation. Following the rule’s adoption, the company excluded fair-value volatility, which Usvyatsky contends is also a form of tailored accounting, as it omits normal, recurring operating expenses.

Coinbase has categorized its crypto 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 also revised its definition of adjusted EBITDA to adjust for gains and losses on crypto held for investment, arguing these do not represent normal, recurring operating expenses necessary for its business.

According to Usvyatsky, the SEC has previously challenged firms’ non-GAAP adjustments, notably sending letters to Bit Digital and MicroStrategy inquiring about similar impairment removals 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. The Dig author Francine McKenna told the newswire that the exchange 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 as of press time.

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