Accounting experts have pointed out that the changes Coinbase made to its accounting reports may violate Generally Accepted Accounting Principles (GAAP).

Citing these experts, MarketWatch reported on June 24 that Coinbase could face regulatory challenges for failing to comply with new accounting rules from the U.S. Financial Accounting Standards Board (FASB).

Background and core meaning of new accounting rules

The new rules set by the Financial Accounting Standards Board (FASB) in the United States mark a major shift in the way cryptocurrencies are accounted for and disclosed. The new rules, which were agreed in 2023 and are expected to be implemented in 2025, will update the traditional cost impairment model to a fair value-based model. This change means that some companies, including Coinbase, can already adopt these new standards in advance.

The core goal of the new rules is to improve the accuracy of digital asset value reflection. Compared with the past practice of simply treating digital assets as intangible assets, the new rules allow companies to re-evaluate their digital assets based on the latest market value. Such adjustments can more realistically reflect the company's gains and losses in 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 high value volatility.

Adjustment and implementation of accounting standards

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 prepared alone and must be used in conjunction with GAAP measures.

Olga Usvyatsky, former vice president of research at Audit Analytics, raised concerns about Coinbase’s post-implementation practices, arguing that Coinbase’s practice of adjusting its adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) by excluding fair value fluctuations after adopting the new rules could be considered a custom accounting technique because it does not take into account normal, recurring operating costs.

However, Coinbase has newly classified cryptocurrency assets in its balance sheet into four items: cryptocurrencies for investment, operating, borrowed, and used as loan collateral. These assets are recorded at fair value, but due to different methods of determining value, when market values ​​change, it affects the recording of gains or losses. In addition, Coinbase has adjusted the 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 questioned the company’s use of non-GAAP measures in its financial reports, especially those that exclude impairment losses from their reports. In particular, the SEC has sent inquiry letters to Bit Digital and MicroStrategy asking them to explain this practice.

The SEC sent a follow-up letter to MicroStrategy in December 2021, explicitly requesting that the company no longer include "adjustments for Bitcoin impairment charges in non-GAAP measures" in future financial reports. This requirement reflects the regulator's firm stance on ensuring the transparency and accuracy of financial reporting.

However, despite the regulatory risks, some believe 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 recommendations are unlikely to lead the company to mislead investors or the market, suggesting that Coinbase's practices may be recognized and supported by professional organizations. #Coinbase #FASB #会计规定 #监管挑战

Conclusion:

In the process of adapting to the new accounting rules of FASB, Coinbase's financial reporting adjustment strategy has been strictly scrutinized by regulators, especially the SEC. This requires the company to pursue transparency and accuracy while also considering the advice of professional organizations to ensure that financial reports comply with regulations and meet market needs.

Faced with regulatory challenges, cryptocurrency companies must continue to 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 the key to the continued growth of these companies.