Coinbase, a prominent player in the cryptocurrency sector, is facing potential regulatory challenges due to its compliance with new FASB accounting rules. These rules, set to take effect in 2025 but already adopted by some firms, shift the accounting and disclosure of digital assets to a fair-value model from the previous cost-less-impairment model.
Changes in Valuation
The new FASB standards aim to provide a more accurate valuation of digital assets by capturing their most recent value rather than treating them as intangible assets. This change comes in response to requests from companies like MicroStrategy and Tesla, which hold significant amounts of volatile crypto. Under the old model, companies had to record digital assets at their historical acquisition prices and assess for impairment each reporting period. The new rule allows for a revaluation of assets at fair market value, reflecting gains and losses more accurately.
Challenges with Compliance
One of the key challenges for Coinbase with the new rules is the introduction of volatility into company earnings. While the new rule aims to provide investors with more useful information for decision-making, it also poses risks of fluctuating earnings due to the valuation changes. Companies often use non-GAAP measures to mitigate such volatility, but these measures must not be individually tailored.
Concerns Raised by Experts
Accounting experts, such as Olga Usvyatsky, have pointed out potential issues with Coinbase’s compliance with the new FASB rules. Before adopting the rules, Coinbase excluded crypto impairment costs from its adjusted EBITDA reconciliation. However, after the adoption, the company excluded fair-value volatility, which could be seen as a form of tailored accounting that omits normal, recurring operating expenses.
Coinbase has made significant changes to its financial reporting in light of the new rules. The company has categorized its crypto holdings into four new items on its balance sheet and adjusted its definition of adjusted EBITDA to reflect gains and losses on crypto held for investment. These changes have implications for how gains and losses are recorded when market values change.
The SEC has previously challenged firms’ non-GAAP adjustments, including inquiries into similar impairment removals in financial reports. Coinbase’s approach to adjusting for gains and losses on crypto holdings has raised concerns about potential regulatory consequences. While some experts downplay the risks, citing advice from accounting firms like Deloitte, the regulatory landscape remains uncertain for companies like Coinbase.
Coinbase’s compliance with the new FASB accounting rules presents both opportunities and challenges. While the rules aim to provide more accurate valuation of digital assets, they also introduce volatility into company earnings. Coinbase must navigate these changes carefully to ensure compliance with regulatory requirements while providing transparent and reliable financial information to investors.