Coinbase’s Accounting Practices Under Scrutiny Amid Regulatory Concerns
Coinbase Global Inc. is potentially facing regulatory enforcement action regarding its accounting practices for crypto assets. This development follows a review by accounting experts of Coinbase’s financial disclosures before and after the early adoption of a new accounting rule issued by the Financial Accounting Standards Board (FASB).
The Shift to Fair-Value Accounting
The new FASB rule, agreed upon last year, transitions the accounting and disclosure model for crypto assets from a cost-less-impairment model to a fair-value model. This change allows companies to reflect the most current value of their crypto assets, unlike the previous method, which required them to record assets at their historical cost and write down the value only if it declined.
This rule change came in response to requests from companies holding significant amounts of cryptocurrency, including MicroStrategy and Tesla Inc., who argued that the previous model did not accurately represent the value of their volatile crypto holdings. By adopting the fair-value model, companies can now record gains and losses in value in their financial statements, providing investors with more relevant information.
Early Adoption and Its Implications
While the rule is set to take effect in 2025, early adoption is permitted, and Coinbase chose to implement it in the first quarter of 2024. The company began accounting for its crypto assets at fair value, recognizing gains and losses through net income. This change has introduced volatility into Coinbase’s earnings, reflecting the fluctuating market values of crypto assets.
Before this adoption, Coinbase had excluded crypto impairment costs from its adjusted EBITDA (earnings before interest, taxation, depreciation, and amortization) calculations, a practice criticized by some experts as creating tailored accounting metrics. Following the new rule, Coinbase continued to adjust its financial metrics by stripping out fair-value volatility, arguing that these gains and losses do not represent normal, recurring operating expenses.
Detailed Accounting Practices
Coinbase has categorized its crypto assets into four distinct groups on its balance sheet:
- Crypto assets held for investment
- Crypto assets held for operational purposes
- Borrowed crypto assets
- Crypto assets used as collateral for loans
Each category is accounted for at fair value, but the method for determining this fair value varies. For instance, long-term investment and collateral crypto assets are remeasured based on specific identification, while operational crypto assets use a first-in, first-out basis. Borrowed crypto assets are initially recorded at cost, with fair value determined using an average costing method.
Regulatory Concerns and Historical Context
The Securities and Exchange Commission (SEC) has historically raised concerns about companies adjusting non-GAAP measures that exclude impairment charges, arguing that such adjustments can create misleading financial metrics. In past comment letters to companies like Bit Digital Inc. and MicroStrategy, the SEC has challenged the exclusion of crypto impairments from adjusted financial metrics, suggesting that these practices substitute individually tailored recognition methods, contrary to GAAP requirements.
Industry Reaction and Broader Implications
Francine McKenna, author of the Dig on Substack and former journalist and academic, highlighted that Coinbase’s actions reflect its efforts to comply with accounting standards amidst its broader regulatory battles with the SEC. The SEC has accused Coinbase of operating as an unregistered securities exchange, broker, and clearing agency, particularly concerning unregistered crypto assets.
Despite these challenges, Coinbase’s stock has performed well, gaining 25% so far in 2024 and 254% over the past 12 months. The company’s proactive approach to adopting the new accounting rule and its ongoing efforts to navigate regulatory scrutiny underscore the complex dynamics at play in the evolving crypto regulatory landscape.
Conclusion
As the crypto industry continues to mature, the intersection of regulatory compliance and innovative financial practices will remain a critical area of focus. Coinbase’s experience illustrates the challenges and opportunities for companies operating in this space, highlighting the importance of transparency, adherence to accounting standards, and proactive engagement with regulatory bodies.