Coinbase may face regulatory challenge for violating FASB's new accounting rules

The background and core essence of the new accounting rules

The new rules formulated by the US Financial Accounting Standards Board (FASB) mark a major shift in the way cryptocurrency accounting and information disclosure is done. The new rules, agreed in 2023 and expected to be officially implemented in 2025, will update the traditional cost impairment model to a model based on fair value. This change means that some companies, including Coinbase, can already adopt these new standards early.

The core goal of the new rules is to improve the accuracy of digital asset value reflection. Compared with the past practice of treating digital assets simply as intangible assets, the new rules allow companies to revaluate their digital asset holdings based on the latest value in the market. Such adjustments more truly reflect a company's gains and losses during a specific period. The implementation of the new rules is particularly important for companies like MicroStrategy and Tesla that hold large amounts of cryptocurrencies with volatile values.

Accounting Standards Adjustment and Implementation

Although the new rules provide investors with more useful information, they also increase the volatility of company earnings. To mitigate this volatility, companies often use non-GAAP (Generally Accepted Accounting Principles) measures in their financial reports. However, these measures cannot be developed independently and must be used in conjunction with GAAP measures.

Olga Usvyatsky, former vice president of research at Audit Analytics, raised concerns about Coinbase’s practices following the implementation of new rules. She believes Coinbase’s adjustment to its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) by excluding fair value fluctuations after adopting the new rules may be considered a form of custom accounting. means because it does not take into account normal, recurring operating costs.

However, Coinbase has a new classification of cryptocurrency assets in its balance sheet, divided into four items: cryptocurrencies for investment, operations, borrowing, and as collateral for loans. These assets are recorded at fair value, but due to different methods of determining value, changes in market value can affect the recording of gains or losses.

Additionally, Coinbase has adjusted its definition of Adjusted EBITDA to exclude investment gains and losses from holding cryptocurrencies, arguing that these do not reflect the normal and recurring operating costs of the company’s business.

Regulators’ focus on accounting standards

However, the SEC has expressed doubts about the company’s use of non-GAAP measures in financial reports, especially those that exclude deductions from reports. A company worth the loss. In particular, the SEC has sent inquiry letters to BitDigital and MicroStrategy, asking them to explain this practice.

SEC issued a follow-up letter to MicroStrategy in December 2021, clearly requiring the company to no longer include "adjustments for Bitcoin impairment charges in non-GAAP indicators" in future financial reports. This requirement reflects the regulator's strong stance on ensuring the transparency and accuracy of financial reporting.

However, despite the regulatory risks, some believe that Coinbase is following the “best advice” provided by Deloitte, one of the Big Four accounting firms. Moreover, Francine McKenna, author of "The Dig", said that these suggestions are unlikely to cause the company to mislead investors or the market, suggesting that Coinbase's practices may be recognized and supported by professional institutions.

Conclusion:

In the process of adapting to FASB's new accounting rules, Coinbase's financial reporting adjustment strategy has been strictly scrutinized by regulatory agencies, especially the SEC. This requires companies to pursue transparency and accuracy while also considering the recommendations of professional organizations to ensure that financial reports comply with regulations and meet the needs of the market. Facing regulatory challenges, cryptocurrency companies must continuously optimize financial reporting on the basis of following accounting standards to protect the interests of investors and promote the steady development of the industry. As the industry matures, how to find a balance between compliance and innovation will be key to the continued growth of these companies.

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