- Coinbase may face regulatory scrutiny over its adoption of a new FASB rule that changes the accounting model for crypto assets to a fair-value approach, potentially introducing volatility into earnings.
- The SEC has previously challenged similar non-GAAP adjustments, raising concerns about Coinbase’s tailored accounting practices.
Potential Regulatory Trouble for Coinbase
Coinbase Global Inc., a leading crypto trading platform, may face regulatory scrutiny over its accounting practices for crypto assets. This comes in light of its early adoption of a new Financial Accounting Standards Board (FASB) rule that changes the accounting and disclosure for crypto assets to a fair-value model from a cost-less-impairment model.
The new rule, set to take effect in 2025, was created in response to requests from companies holding large amounts of volatile crypto assets, such as MicroStrategy and Tesla Inc. It allows these companies to record the most recent value of their crypto assets, unlike the current practice of treating them as intangible assets, which only records their historical purchase price.
A Shift in Accounting Practice
Under the previous model, companies had to record crypto assets at their acquisition price and assess their value periodically to determine any decline, recording impairments accordingly. Olga Usvyatsky, a former vice president for research at Audit Analytics, highlighted that companies could write down the value but couldn’t write it back up if the asset’s value increased. This posed a challenge, especially given the significant swings in crypto assets like Bitcoin, which has seen a 50% rise in 2024.
The new rule, embraced by the majority of FASB respondents, aims to provide investors with more useful information by reflecting current asset values. However, it also introduces volatility into company earnings, as holders must record gains and losses on their income statements continually.
Coinbase’s Accounting Adjustments
Coinbase’s accounting practices have come under scrutiny for creating tailored metrics by excluding crypto-impairment costs from its adjusted EBITDA reconciliation. EBITDA stands for earnings before interest, taxation, depreciation, and amortization. This practice effectively strips out normal operating expenses, raising concerns among accounting experts.
When Coinbase adopted the new rule, it continued this practice by excluding fair-value volatility, further tailoring its accounting measures. This approach categorizes crypto assets into different balance sheet items, including investments, operational purposes, borrowed crypto assets, and collateral for loans.
Each category is accounted for at fair value, but the method of determining this value varies. For instance, long-term investments and collateral are remeasured at fair value on a specific identification basis, while short-term operational assets use a first-in, first-out basis.
SEC’s Response and Implications
The SEC has previously challenged companies on similar non-GAAP adjustments, as seen in its correspondence with Bit Digital Inc. and MicroStrategy. The regulator has warned against substituting individually tailored metrics for GAAP-compliant measures, citing the potential for misleading financial reporting.
Coinbase’s stock has performed well, gaining 25% in 2024 and 254% over the past year. However, the company is embroiled in a broader dispute with the SEC regarding its status as an unregistered securities exchange, broker, and clearing agency. This regulatory battle underscores the complex and evolving landscape of crypto asset management and the importance of adhering to established accounting standards.
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