Is Coinbase using its method to adjust crypto impairment costs in its financial reports? The cryptocurrency exchange is facing scrutiny for how it accounts for crypto assets. Recently, Coinbase changed its accounting practices ahead of schedule, shifting how it reports the value of these assets. This pre-scheduled strategy has put Coinbase in trouble, let’s see what’s at stake. 

What’s Happening

Coinbase decided to use a new rule from the Financial Accounting Standards Board (FASB) before it officially kicks in by 2025. This rule shifts how crypto assets are valued in financial reports. Instead of reporting them at their original cost minus losses, Coinbase now reports them at their current market value, which can change frequently due to the volatile nature of cryptocurrencies.

It came into action after, MicroStrategy MSTR, -7.52%, and Tesla Inc. TSLA, -0.23%, which own huge quantities of volatile crypto, requested the rule modification.

Why It Matters

With this change, Coinbase can adjust its earnings calculation to exclude costs related to losses on these assets. Some experts say this creates a customized reporting approach that might not follow standard accounting rules. 

Olga Usvyatsky, a former vice president for research at Audit Analytics and author of Deep Quarry said “Companies complained because they could write the value down but not back up if the asset increased in value,”. While companies cannot alter such metrics claims causing volatility in the market and Coinbase did that claims Usvyatsky. 

This is crucial given the wild fluctuations in crypto assets like bitcoin BTCUSD, 1.98%, which has risen 50% in 2024.

Regulatory Concerns

Regulators, like the SEC, require companies to prioritize Generally Accepted Accounting Principles (GAAP) in their financial reporting. They want a clear and equal presentation of non-GAAP measures like those of Coinbase, raising questions about compliance.

However this is not happening for the first time, according to Usvyatsky, the SEC has previously questioned Bit Digital and MicroStrategy’s non-GAAP adjustments, including impairment reductions in financial reporting.

Market Reaction

Coinbase stock shot up 25% in 2024 and 254% in the previous year. Investors are widely watching what happens next. Companies holding crypto assets are looking for better ways to display their holdings’ worth in financial statements, like Coinbase.

This scrutiny affects Coinbase and sets a precedent for how other companies report crypto assets in the future. It shows the growing pains of the crypto industry as it seeks to establish itself in the financial world.

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