Coinbase more likely to get SEC action over crypto accounting after regulator dings rival for same practice

“Please revise to refrain from presenting these individually tailored non-GAAP measures,” the SEC said in the letter.

As MarketWatch reported in June, Coinbase
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did exactly the same thing when it opted for early adoption of the new rule, which the FASB agreed to last year.

The rule changed the accounting and disclosure for crypto assets to a fair-value model from a cost-less-impairment model. The rule is due to come into effect in 2025, but early adoption is allowed.

The rule change came after requests from companies that hold large amounts of crypto, including MicroStrategy Inc.
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 and Tesla Inc.
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 for rules governing their accounting for those assets, which are typically volatile.

The rule will allow companies to capture the most recent value of a crytpo asset, unlike the current accounting practice, which is to treat them as intangible assets. Intangible assets include such items as brands, copyright and intellectual-property markers, such as trademarks.

Under that treatment, companies had to record crypto assets at the historical price at which they were acquired, and then make an assessment every reporting period as to whether the value had declined, in which case they would record an impairment.

“Companies complained because they could write the value down but not back up if the asset increased in value,” said Olga Usvyatsky, a former vice president for research at Audit Analytics and author of Deep Quarry, a Substack publication focused on accounting, at the time.

That matters to companies, including Marathon Digital, because crypto assets such as bitcoin enjoy strong gains as well as losses. Bitcoin is up more than 53% in the year to date, for example, outperforming the S&P 500’s
SPX
17% gain.

Usvyatsky had correctly noted last year that the rule would introduce volatility into company earnings if crypto asset-holders had to continually record gains and losses on their income statements.

And she was right in thinking they would do what they do with other items that create volatility, namely to strip out the effect using non-standard, or non-GAAP metrics, or those that do not comply with Generally Accepted Accounting Principles (GAAP), the U.S. accounting standard.

Companies are allowed to use such metrics, but they must lead with GAAP-compliant ones, give equal prominence to both and offer a reconciliation of the two. Above all, they are not allowed to create individually tailored metrics when using non-GAAP measures.

Coinbase did exactly that, however, according to Usvyatsky.

Before it adopted the new rule, the company stripped crypto-impairment costs out of its adjusted Ebitda reconciliation. Ebitda is an acronym for earnings before interest, taxation, depreciation and amortization.

That creates tailored accounting, as it strips out normal, recurring operating expenses.

Then, in the first quarter, when adopting the new rule, the company stripped out the fair-value volatility, which again creates tailored accounting, she said.

“Stripping out impact of a new accounting guidance may create tailored accounting measurements that violate Regulation G. SEC comments to Marathon Digital reiterate this view,” she told MarketWatch on Wednesday.

Francine McKenna, author of the Dig on Substack and a former journalist and academic, said an SEC letter doesn’t always prompt companies to proactively stop violating the same rules.

“However, the message to Marathon Digital was crystal clear,” she said. “I wouldn’t wait for the SEC to call to eliminate any individually tailored non-GAAP measures.” (McKenna is a former MarketWatch reporter.)

Coinbase responded to a request for comment on the matter back in June by referring to its 10-Q filing with the SEC summarizing the change.

It also pointed to a revised definition of adjusted Ebitda, “to change what is adjusted with respect to gains and losses on crypto assets in connection with the adoption of ASU 2023-08, adjusting post-adoption only for gains and losses on crypto assets held for investment, as they do not represent normal, recurring, operating expenses (or income) necessary to operate our business.”

In other words, because the assets are held for investment, the company believes they are not part of normal operating activity and stripping the volatility does not remove normal recurring operating expenses.

Usvyatsky looked at past comment letters the SEC had sent to companies, challenging non-GAAP adjustments that removed bitcoin impairments.

In one dated Sept. 22, 2022, the SEC sent a comment letter to Bit Digital Inc. 
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 directly suggesting that adjusting for impairments would substitute individually tailored metrics and violate Reg. G.

“Please explain why you believe that adjusting for impairment of digital assets provides useful information to investors given that you use your digital assets to, in part, fund your operations and also considering the recurring nature of this charge,” the regulator wrote.

“Please also tell us how you considered whether these measures substitute an individually tailored recognition and measurement method for those of GAAP which results in a misleading non-GAAP measure that violates Rule 100(b) of Regulation G.”

Marathon Digital acknowledged the SEC’s concern in the letter published Wednesday and said it did not intend to “present a measure to have the effect of changing the recognition and measurement principles in accordance with GAAP.

“The company will prospectively refrain from presenting such individually tailored non-GAAP measures,” it said in response to the comment letter.

Coinbase did not immediately respond to a request for comment on Wednesday.

The stock was down 3% Wednesday but has gained 39% in the year to date.