Coinbase has shifted to a new accounting standard, and experts believe that there is a slight margin left for authorities to take note of. The new standard requires Coinbase to account for cryptocurrencies at their fair value. This marks a transition from the cost-less-impairment model. These rules were approved by FASB in 2023 and will go into effect in the next year, that is, in 2025.
However, companies have the liberty to make the transition before the deadline. Binance, among others, has done that by adopting the new accounting standard practice. The market believes that the way in which Coinbase is making the transition violates GAAP.
One reason to adopt the new accounting standard is that it allows companies to record digital assets at fair value. The previous model would enable them to consider a decline in the valuation but not subsequent increases. They could not bring out gains and losses as accurately as they wanted.
The new practice has garnered criticism, too. Olga Usvyatsky, former VP of Research at Audit Analytics, has said that while it allows investors to access more useful information, it also introduces volatility in a company’s earnings. The former VP of Research at Audit Analytics further believes that Coinbase may have created individually tailored metrics to mitigate volatility in its record.
It is generally a part of companies’ practice in these scenarios wherein they deploy non-GAAP measures in their financial reports to mitigate volatility. They still have revised practices in books but with no consideration for volatility in any manner.
One way Coinbase has done so is by excluding fair-value volatility. Coinbase has also revised the definition of adjusted EBITDA to account for gains and losses on crypto tokens that it has held for investment.
If the US Securities & Exchange Commission questions adjustments by Coinbase, then it would not be the first time in the industry. The SEC previously did it with Bit Digital and MicroStrategy, seeking details about impairment removals in financial reports. The Commission sent a letter to MicroStrategy in December 2021 asking it to remove adjustments for Bitcoin—non-GAAP measures in future filings.
The development comes hours after Coinbase reported an increase in sell pressure. It stems from the dip in Bitcoin price to just above $61,000. Data published by Coinglass has revealed that a large portion of holdings has been liquidated amid the decline. It amounts to $280 million, out of which $260 million are said to be long positions.
Bitcoin continues to fall, and the community continues to believe that a low point on the horizon will lead to a rebound in the token value.
For now, it is safe to conclude that Coinbase is on the edge of coming under the radar for its tailored accounting metrics. The SEC has sent MicroStrategy letters asking them to revise their practices.
