Coinbase’s Early Adoption of FASB Guidelines: What Finance Operators Need to Know.
Coinbase's Q1 2024 report highlighted a 72% revenue increase to $1.6 billion and significant financial benefits from adopting the new FASB ASU 2023-08 standard, which resulted in an additional $650 million in reported gains.
TL;DR
Coinbase's revenue surged to $1.6 billion, a 72% increase from the previous quarter, with net income reaching $1.2 billion. The company also reported a record $1.0 billion in adjusted EBITDA, surpassing the total for all of 2023.
Adoption of FASB ASU 2023-08 led Coinbase to report an additional $650 million in gains, significantly impacting net income and earnings per share. The standard requires crypto assets to be measured at fair value, influencing financial statements profoundly.
By adopting FASB ASU 2023-08 early, Coinbase not only adjusted its financial reporting to reflect more realistic asset values but also set a precedent for transparency and financial reporting standards in cryptocurrency, potentially encouraging wider crypto adoption.
What was important about Coinbase’s Q1 report?
Coinbase reported strong results for the first quarter of 2024, surpassing expectations with significant growth in revenue and profitability. The company generated $1.6 billion in total revenue, a 72% increase from the previous quarter, and $1.2 billion in net income.
Adjusted EBITDA hit a record $1.0 billion, surpassing the total generated in all of 2023. Coinbase's market share in the US spot and derivatives markets increased, and the company reached all-time highs on Coinbase Prime. Coinbase's Layer 2 solution, Base, has been expanding the utility of crypto by improving infrastructure, increasing network stability, and empowering builders
That said, the accounting world has been eagerly anticipating this report for a different reason.
In the Coinbase Q4 2023 Shareholder Letter, Coinbase committed to changing how it measures the majority of its crypto assets.
What is FASB (ASU 2023-08)?
FASB ASU 2023-08, titled "Accounting for and Disclosure of Crypto Assets," was issued by the Financial Accounting Standards Board (FASB) on December 13, 2023. This new standard focuses on the accounting and reporting of certain types of crypto assets. Key highlights include:
It mandates that qualifying crypto assets be measured at fair value, with changes in fair value recorded in net income each reporting period.
The standard applies to crypto assets that are intangible, do not provide enforceable rights to underlying goods/services/assets, are created or reside on a distributed ledger, are secured through cryptography, are fungible, and are not created or issued by the reporting entity.
The adoption of this standard aims to provide a more accurate representation of the economic realities of crypto assets, simplifying the previously complex impairment model under ASC 350.
New disclosure requirements are introduced, covering areas such as significant crypto asset holdings, contractual sale restrictions, and changes in holdings.
The effective date for this standard is for fiscal years beginning after December 15, 2024, though entities are allowed to adopt it early.
How did Coinbase interpret FASB (ASU 2023-08)?
The adoption of ASU 2023-08 by Coinbase significantly impacted their Q1 financials in two major ways:
$650M of newly reported gains
Under the new FASB ruling, Coinbase has to report an additional $650 million in gains, which would not have been recorded on their income statement (IS) prior to this change.
Coinbase’s earnings per share (EPS) jumps to $4.40 with this newly reported gain, nearly 4x of the expected estimate of $1.07.
These additional gains directly increased Coinbase's net income (NI) to $1.17 billion.
These gains can also be seen recorded in Cash Flow Statements under Operating Activities per the FASB guidance for disclosure.
Updates to Adjusted EBITDA
In order to simplify their financial reporting for investors, Coinbase introduced an amendment on how they define their Adjusted EBITDA to normalize financials for the sake of stakeholder legibility.
The definition was revised to adjust only for gains and losses on crypto assets held for investment following the adoption of ASU2023-08.
This change reflects Coinbase’s belief that such gains and losses are not considered normal, recurring operating expenses (or income) necessary to operate the business.
Notably, taxable income for tax authorities remains higher through this transition.
RELATED STORIES
Coinbase previews how to leverage the new FASB standards
Coinbase adopting these standards early gives the whole crypto community a preview into how applying the new rules can impact your business.
Before these standards crypto companies reporting under US GAAP accounted for crypto assets as indefinite-lived tangible assets, like IP. The problem with this application was that crypto assets were not allowed to be amortized – but rather were written down or impaired to fair value whenever the fair value fell below carrying amount, without any options to true up or mark up the values if fair values increased at a future date.
Alyssa Choo at Bitwise gives a great example where if the price of Bitcoin fell, companies would report what would look like a loss. But if it rose, entities could not mark up the value unless it sold its crypto. Now companies can account for and disclose the real value of their crypto assets in quarter end financials.
The other important lens is that TradFi now has both rules and examples of how to operate a crypto financial report, which should alleviate reluctance to take on crypto “complexity”. Less reluctance, means more adoption.
Frequently Asked Questions
What impact did the adoption of FASB ASU 2023-08 have on Coinbase's Q1 2024 financials?
The adoption of FASB ASU 2023-08 allowed Coinbase to report an additional $650 million in gains, significantly boosting their net income and affecting earnings per share and other financial metrics.
How does FASB ASU 2023-08 change the accounting for crypto assets and why is it important?
FASB ASU 2023-08 mandates that qualifying crypto assets be measured at fair value, with changes recorded in net income, simplifying the previous complex impairment model and aiming to provide a more accurate representation of the economic realities of crypto assets, which is crucial for transparency and fair financial reporting in the rapidly evolving cryptocurrency market.
